Forty Years Ago I remember it was like yesterday. I was in a strange town that was to become my new home and I had two hundred bucks which wasn't much even forty years ago. Granted, I had a new job at $1,200 a month (equivalent to $5800 at today rates) but I had to make that money last 15 days until I got a pay check. Fortunately, I found a hole-in-the wall apartment for $75.00 and I had pretty well figured out how to make the remaining $125.00 last until payday.
Murphy's Law Strikes. One aspect of Murphy's law is Whatever can go wrong, will go wrong. About a week from payday things started to go wrong. A series of one flat tire after another told me that I was in desperate need of four new tires. The old tires were without tread and paper thin. To say that they were unsafe, even to drive to work, was an understatement. I had to have new ones at a cost of around $150.00. Even if I could make these last until pay day, I would not have enough money left after this to last another two weeks. I had to borrow enough to buy these tires.
Limited Choices. My irresponsible behavior of the last six months certainly limited my choices. My credit was poor and my employment unstable. Subtracting my liabilities from my limited assets resulted in a negative number. A typical lender wouldn't touch me. I was forced to consult a consumer finance company. They weren't enthusiastic either but they finally offered me a loan with modest payment and 33 months to pay. I had no choice but to accept at a rate in excess of 24%. Frankly, that was the best deal I ever made. It took most of the 33 months to turn my finances around but without that loan, I might not have been able to get back and forth to work in order to stabilize my life.
Not an Uncommon Situation Today. In this environment, interest rates are low but prime lenders are running scared and holding tightly to their money. Borrowers with no collateral and unstable employment are often forced to deal with some of these so-called predatory lenders just to keep food on their table and a roof over their head. Of course the first option is to find ways to meet obligations without borrowing. You can seek extra work or sell assets as a temporary solution. I have seen well-educated professionals who have taken jobs as retail sales clerks or at temporary day-labor. Remember, there is no dishonor in honest work, no matter how well educated you are. If you can't bring in some extra money, here is a list of lenders who take less qualified borrowers. They are listed in order of risk.
1. Loan Sharks. These are often members of organized crime who loan to drug addicts gamblers. Their rates can be 100% or more and their objective is to retain you as a customer for their illicit activity. These are to be avoided at all cost. If you are tempted to deal with these, make sure you have a rock-solid exit strategy. They may resort to violence to collect.
2. Payday Lenders. These loan on an anticipated pay check. Rates are extremely high and, if you become delinquent, they often will increase the loan size to pay off the current loan and interest. Their collection procedures, while non-violent, are aggressive. Again, it is preferable to have a rock-solid exit strategy before dealing with these.
3. Consumer Finance Companies. These are a step above the payday lenders. Their rates are higher than banks and their collection procedures are aggressive, still they can be a reasonable source of funds as long as you can make the payments on time. The first two lenders on this list are important to get out of your life as soon as possible; however, holding these loans to maturity and making the payments on time can be a reasonable strategy.
4. Credit Cards. Many of these are offered by major banks and competition has forced the rates to lower levels but you still need to be careful, especially if you take cash advances or make late payments. Some of these will increase your rates to 20+% if you are delinquent beyond a certain point. The problem with cash advances is that there can be fees up to 2% up-front.
5. Hard-Money Lenders. These are generally mortgage lenders who loan strictly on the value of the collateral with no value placed on the creditworthiness of the borrower. Rates may not be excessive but up-front fees and delinquency charges are substantial. Most don't employ aggressive collection procedures; however, they can be very aggressive in obtaining ownership of the collateral. Most will extend the loan if you can't pay in full at the end of the term; however, be prepared for substantial fees in the process.
This Is A Quick Survey. As you may have guessed, I am not as critical of some predatory lenders as those who would add another layer of government regulation. They do serve a need in the market place and, if the borrower is sufficiently knowledgeable to manage the risk. can be used to solve problems that may arise. The most important point is not to use them to buy things you don't really have to have. If this is the only way you can afford a certain item, it is usually preferable to delay purchase if the item. Ask yourself, if you really have to have it now or even at all. In the long run, utilizing this type of financing will detract, not add, to your standard of living.
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