5 stupid 'fixes' for money woes

By Liz Pulliam Weston

A souring economy brings many unpleasant things. Layoffs. Bankruptcies. And what can only be called the Bad Idea Brigade.

Most of these are businesses that thrive on consumers' desperation and desire for a quick fix. Their advertisements on the Web, radio and television are kicking into high gear right about now.

Out of money? Don't worry, they say, you can hock your next paycheck or your car. In debt? They'll make it go away or at least make it more "affordable."

Or maybe you've come up with your own "solution" for a money problem: raiding your retirement funds. The money's just sitting there, right? Here's what to think about the next time you're tempted by one of these fixes:

Stupid fix No. 1: Payday loans

Your wallet's empty, your checking account is running on fumes, and it's still a long way to your next paycheck. So you trundle over to your friendly neighborhood payday lender, write a postdated check for $300 and get $255 in cash.

That $45 fee may not seem like much, but for a two-week loan it translates to an annual interest rate of nearly 400%. (Read "Loans with triple-digit interest" for more details.)

What's worse, one payday loan may touch off a cycle of borrowing that can quickly escalate into big bucks.

Because, let's face it, if you were good at managing money, you wouldn't need a payday lender. You'd have an emergency fund or access to cheaper (much cheaper) credit. So chances are good you're going to run out of money again before the next payday, especially since you now have to pay back that $300 loan.

• Drowning in debt? Ask an expert, for free

That crunch leads many people to renew or roll over their debt, or borrow from another payday lender.

"I cannot get out of the cycle of paying one off," reader "Seth" e-mailed me recently, "and then having to take out another to make it to my next payday."

Reader "Valerie" is in even worse shape. She owed so much to payday lenders that they cut her off and put her on a repayment plan. That might be OK if she could manage the $1,500 monthly payment, but she can't.

"I just cannot afford this," she lamented. "I am extremely stressed about all these debts."

You have plenty of better alternatives. In the long run, of course, you want to build up a cash cushion (see "Why you need $500 in the bank"). But for now, you can deal with a true emergency in these ways:

• Ask your employer for an advance. Some companies will give you a cut of your check early. Approach your human-resources department.

• Check with a credit union. Not-for-profit credit unions worry about their members resorting to payday lenders and have come up with alternatives, including short-term loans. If you don't belong to a credit union yet, read "Ditch your bank for a credit union" and check out FindaCreditUnion.com.

• Sell something. Anything. The quickest way to raise cash may be to have a yard sale.

• Get a cash advance on your credit card. This is a pretty expensive option because cash advances usually accrue at a much higher interest rate than other credit card debt -- typically well over 20%. But that's a bargain compared with a payday loan.

Stupid fix No. 2: Title loans

Title loans are a lot like payday loans: They come with triple-digit interest rates and short payback periods (usually one month), so many borrowers wind up "renewing" the debt over and over, often paying far more in fees than they initially borrowed.

The big difference is that if you fail to pay, the lender can take your car.

If that's what gets you to your job, you could quickly have an even bigger financial nightmare on your hands (no car and no job).

The better alternative: If you have substantial equity in your car, you may be able to sell it, buy something cheaper and use the difference to meet your cash needs. If that's not a good option for you, explore the alternatives above.

Stupid fix No. 3: Debt settlement

Debt-settlement companies promise that you can get out of your debts for pennies on the dollar. Typically, these outfits demand that you stop paying your creditors and instead send the money to them. After a few months, the debt-settlement company promises to open negotiations with your lenders and use the money you've sent to pay them.

Continued: What it costs you

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