Let's say you're in the process of building your emergency fund but you're not quite there yet. Your car breaks down. When you're desperate, you make desperate decisions. There are companies that bank on your desperation and then profit from trapping you in a downward spiral of debt. Avoid these debt traps:

Payday loans: These are small, short-term loans with incredibly high interest rates. Ideally, you're supposed to pay them back with your next paycheck. Unfortunately, most people can't afford to pay them back in full, so they either default on the loan or end up taking out another loan to pay off the first one. Then they're trapped.

Skipping insurance: When you're desperate to save money, you might cut back on crucial expenses, like car insurance. That's a big risk: one accident could set you back even more than you already are.

High-interest credit cards: This is almost as bad as funding your emergency with a payday loan. If you miss one credit card payment, you're on the hook for fees and interest, which can trap you in a cycle of paying off debt for a long time.


So what are some better options if you're truly desperate? Look into these options before you trap yourself:

Credit union loans: A lot of credit unions offer short-term emergency loans. Their borrowing terms are usually much better than something like a payday loan and they often accept applicants with poor credit, too.

Small dollar loans: Some banks offer "affordable" small loans to customers going through a rough patch. The interest rates are usually pretty high, but not nearly as high as payday loans and often lower than many high-interest credit cards.

Peer-to-peer lending: There are online tools like LendingClub and Prosper that connect borrowers to regular folks who lend their own money (they get to earn interest on it). The interest rate you'll pay depends on your credit and how much risk the individual lender is willing to take on.

From GET MONEY by Kristin Wong, courtesy of Hachette Books.


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