Six Quick Cash Traps to Avoid

As the economic crisis drags on, more and more cash-strapped Americans are looking for quick and easy ways to drum up the resources to stave off foreclosure, fill the gas tank or simply put food on the table.

While there's nothing wrong with attempting to pull down the dollars quickly, desperation might lead you to make decisions that satisfy an immediate need but place you in worse financial straits than before. If you've been trying to think of ways to raise cash quickly, here are six ideas you would do better to avoid if you don't want to pay a big price.

You Can't Stop With Just One Payday Loan

A payday loan is often considered the granddaddy of bad quick-cash ideas. The concept is simple: You borrow a sum from a lender with the promise to repay the total, plus fees and interest, on your next payday. The catch? Those fees and interest are exorbitant. According to the Consumer Federation of America, a typical fee for a payday loan is $15 to $30 per $100 borrowed for a two-week period, amounting to an APR ranging from 390% to 780%.

If the borrower can't pay back the loan when due, the finance charges continue to apply until the loan is repaid, trapping the borrower in a hard-to-end cycle of debt. "People tell themselves it's going to be a one-time event," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. But most people desperate enough to take out a payday loan still don't have cash to spare when the loan comes due, she says.

If you must: Don't take out a payday loan without a solid plan for prompt repayment. "Borrow from family or friends or take a part-time job," says Cunningham. "Do whatever it takes to keep the loan from rolling over."

Don't Invade Your Retirement Fund

Reality television shows such as "Hardcore Pawn" and "Pawn Stars" have thrust pawnshops in the limelight recently, making them seem more accessible to quick-cash seekers who previously might have shunned them. Nonetheless, "pawnshops are usually only a good idea for people who buy merchandise there," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling.

Pawnshops operate by loaning money for a piece of merchandise, typically at a fraction of the item's value. Borrowers have 30 to 90 days to pay back the loan, along with high fees and interest, or risk forfeiting the item. "If you can't pay back the loan, you'll have sold your merchandise for cents on the dollar," says Cunningham. You can also sell your goods outright to pawnshops, but you may get more money if you sell at a yard sale or on the Internet.

If you must: Interest rates at pawnshops can range from 5% to 20%, depending on the store and applicable state laws. Shop for the lowest rate and best price you can get for your merchandise. "Use the money to put out the fire," says Cunningham, "then figure out what led to the situation, and try to develop a plan so that it never happens again."

Cash-Out Mortgage Refinancing Adds to Debt

Cash-out mortgage refinancing isn't always a bad idea, but if undertaken imprudently, it could leave you financially worse off in the long run. Under this type of refinancing, a homeowner obtains a new mortgage for a larger amount than the existing mortgage and pockets the difference. For example, if the current mortgage is $50,000, the homeowner may refinance for $80,000 and receive the $30,000 difference in cash.

The bottom line is you're taking out an additional loan and increasing your debt, says Harrine Freeman, CEO of H.E. Freeman Enterprises in Bethesda, Md. This could mean facing higher monthly payments, increased costs for homeowner's insurance, payments for private mortgage insurance and a longer loan life. Don't forget to factor in closing costs, which could run several hundred dollars or more, adds Freeman. Also, your credit score could decrease because you now owe more debt.

Worst-case scenario? If you default on your mortgage after the refinancing, you could find yourself without a home, with greater liabilities and with a lower credit rating.

If you must: Don't use the money for frivolities or short-term purposes. "Use the cash-out to do something that generates income, like starting a business," Freeman says.

Credit Card Advances Carry Sticker Shock

Taking advances through your credit card might seem like the easiest way to lay your hands on some cash, but you'll pay through the nose for that convenience. Uninformed borrowers "think that a cash advance will be at the same interest rate as purchases on their credit card, but the (cash advance) rate can be double," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. Also, unlike ordinary credit card purchases, the interest for a cash advance begins to accrue from the moment the funds are received, not after a 30-day grace period.

Freeman adds that many card issuers require the balance on your regular purchases to be paid down before they'll apply payments toward the cash advance. If you can't bring your balance to zero quickly, you could be stuck accumulating interest at a high daily rate for a long time.

If you must: Use a credit card that has zero balance and pay the advance back speedily.

Don't Risk Your Car With Title Loans

Like payday loans, car title loans are small, short-term loans that come with a triple-digit annual interest rate. But while payday loans are secured with a postdated check, title lenders hold the title of the borrower's vehicle -- and a copy of the keys -- as collateral. If borrowers default on the loan, they lose their car.

This fact alone can make car title loans even more dangerous than payday loans, says Jay Speer, executive director of the Virginia Poverty Law Center, a nonprofit organization that fights against unfair lending practices. "Most folks only have one car. If you lose your car, you could lose your job," because you can't get to work.

If you must: Be prepared to give up your car, says Speer. Because title lenders charge hefty fees in addition to high interest rates, borrowers often spend huge sums paying for these extra charges without ever making a dent in the principal. If you can manage without a car, it could be less expensive (and less stressful) to allow the lenders to take it. "All they can do is repossess the car," says Speer. "They can't come after you for more money."

Pawnshops Only Benefit the Owners

Reality television shows such as "Hardcore Pawn" and "Pawn Stars" have thrust pawnshops in the limelight recently, making them seem more accessible to quick-cash seekers who previously might have shunned them. Nonetheless, "pawnshops are usually only a good idea for people who buy merchandise there," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling.

Pawnshops operate by loaning money for a piece of merchandise, typically at a fraction of the item's value. Borrowers have 30 to 90 days to pay back the loan, along with high fees and interest, or risk forfeiting the item. "If you can't pay back the loan, you'll have sold your merchandise for cents on the dollar," says Cunningham. You can also sell your goods outright to pawnshops, but you may get more money if you sell at a yard sale or on the Internet.

If you must: Interest rates at pawnshops can range from 5% to 20%, depending on the store and applicable state laws. Shop for the lowest rate and best price you can get for your merchandise. "Use the money to put out the fire," says Cunningham, "then figure out what led to the situation, and try to develop a plan so that it never happens again."