Or…

“Let Dough Drizzlers give you $10,000 in 24 hours… you don’t even need to own a house!”

Or…

“Here, cash these enclosed convenience checks to get money fast!”

Not so fast.

These offers and others that target people who are having cash flow problems are more of a problem than a solution. Why? Because they are the equivalent of throwing a drowning person not a life preserver, but instead throwing him an anchor.

Pay Yourself First or Gouge Yourself?

Do you Pay Yourself First? Or do you gouge yourself?

Let’s start with the pay day loan. You are borrowing money from yourself. It sounds so harmless and convenient, right? And all you have to do is pay a “small” convenience fee. Well, when you factor in the time factor for such a short-term loan, you end up paying a fortune.

Example: You would never pay 40% for a credit card, right? That’s outrageous. Well, consider this: if you write a check payable in two weeks “APRs on a pay day advance can be well over 700%!”for $256 and today receive only $200, you are paying $56 in interest and charges. Sounds good so far.

But if you consider what you’re paying as an “annualized percentage rate” (APR), you’re paying something far more outrageous than that 40% credit card. In fact, when you work it out to an annual basis — which is the standard way to consider loans and interest — this short-term payday loan and its convenience fee work out to be something like over seven hundred percent (700%). In fact, for our example, the $56 cost for a loan of two weeks is 730%.

Let Us Gouge You – Cha-Ching!

What about those places that promise you something like $10,000, and you don’t even have to own a house? How do they do that? Simple. You’re going to pay them back, and in spades. Or dollars.

To repay that wonderfully useful $10,000 (and let’s face it, who couldn’t use an extra ten grand in cash?), you’re going to be making monthly payments of hundreds of dollars a month for the next 10, 20 or 30 years. Think about that. It’s like buying a car or a house, except you have nothing to show for it but the debt. This would all be wonderful if you used that $10,000 to help you make more money than it’s going to cost you. However, very very few people know how to get a 30% return on any investment.

More likely, you’d use this cash to buy things you’ve wanted (bad idea) or pay down other debt (slightly better idea). Still, the bottom line is you have a new debt that will burden you for decades to come. If you slip up at any time, they will harass you mercilessly before they sue you, take you to court, and get a judgment. After that, they can garnish your wages. And for what? Tread into these things very carefully.

(note: this topic is different than a home equity loan or cash-out refi, which can be a perfectly prudent way to solve a cash crunch problem)

Rip up the Checks

How tempting is it to get those delightful checks from your credit card company for thousands of dollars… made out to your unique name and ready to cash right now? Talk about throwing a drowning guy an anvil.

They know you’re in debt, and they know you’re drowning. So what do they do? Offer you more debt. Except this debt is even worse than your normal credit card debt. Why? First, the APRs on this type of cash advance (which is really what it is) starts accruing on Day One, as opposed to most of your credit card purchases. For those, you usually get a 30-day or so grace period before the interest starts racking up. Second, these checks are at a higher interest rate than your usual credit card. So, even if you have an 11% credit card, these convenience checks can often go at the 20% (or higher) cash advance rate.

It’s just more debt. And that’s just where they want you. More dependent on them. More trapped. And hopefully, all set to make minimum balance interest only payments for the rest of your life. They don’t want you out of debt, they want you deeper in it.

Bottom Line

None of these are as helpful as they seem, especially when you consider the real costs, the hidden costs. You want to get out of debt, not deeper in it. What is your debt solution?

One thing is for certain: it’s not the lead weight of more debt.