A pet mouse cycling endlessly on a run around wheel is fun to watch. Being a human mouse on the run around wheel of debt – not so fun. Ideally, when surprise expenses rear their ugly heads, you can dig into your emergency fund no worse for the wear. Unfortunately, according to CNNMoney , 27 percent of Americans have no savings at all.
When surprise expenses appear and you need money fast, there are three quick borrowing options:
- Small consumer loan at the local bank
- Payday loan
- Pawn loan
The lowest risk and interest rates would be found at the local bank. For those with a bank account and good credit rating, this would be the best choice. Loans are offered only to people who can reasonably be expected to repay the debt, therefore lenders can afford to charge lower interest rates.
Lenders typically offer borrowers a set loan amount for two weeks, with a percentage rate interest. The borrower offers a post-dated check and proof of employment in exchange for the short-term loan. Risk is very high for the lender, therefore interest rates are extremely high.
Responsiblelending.org lists annual interest rates charged for two week payday loans at 391 to 521 percent. They also offer a fact sheet providing a breakdown of the reasons this type of borrowing tends to result in a vicious cycle of revolving debt.
For those who have sufficient collateral to offer, visiting a jewelry pawn shop may be the ideal solution. The collateral for the short-term loan is held by the pawn shop for a specified period, which is usually 30 days. As long as the borrower can raise the fee for the loan before the time ends, they can redeem their items with no loss incurred, save the predetermined interest charge.
Pawn shop owners hold the valuable collateral until refunded the amount of the loan plus interest. They have a low risk of not being able to cover the expense of lending the money, therefore interest rates are significantly lower than payday loan lenders.
In the worst case scenario for a person who pawned an item, the money is not available at the end of the loan period and ownership of the object is forfeited. While losing the item may prove painful, the cycle of debt has ended at this point, and the person is free to move forward.
Avoiding the run around wheel of debt starts with the choices made on a daily basis. Any amount set aside in savings will be a step towards alleviating the need to borrow funds when an emergency happens. If unplanned expenses arrive before your savings is built up, then choose the least risky, lowest interest loan available for your situation.