by Trent Lorcher

Created on: June 06, 2008   Last Updated: December 05, 2008

Avoiding these five mistakes when raising cash quickly can prevent a financial disaster.

PREDATORY LOANS

Lending institutions prey on high risk borrowers because the lender can charge higher interest rates. The unethical marketing of interest only, negative amortization and option arm loans to sub-prime borrowers uncovered the dangers of predatory lending.

Here's how these loans work: borrower A wants to raise cash quickly and decides to refinance his house. Lender X advertises a teaser rate of 1%, although the actual rate of the loan is 10%. Borrower A makes a payment as if the rate were 1%. Because his payment doesn't even cover the interest on the loan, the principal balance of the loan increases. Once the terms of the teaser rate expire or the principal balance of the loan exceeds 120% of the home value, the rate and payment reset. Borrower A, who can barely afford his original monthly payment, now has to pay twice the amount.

Before signing any loan documents, carefully read the truth-in-lending statement. If you're not sure how the loan works, find someone honest who does.

UNSECURED LOANS

Predatory Lending does not restrict itself to the housing market. Payday Loans promise quick cash but give bad debt. For example, you need a $1,000 quickly, so you go to the local check-cashing loan center. You write a check for $1,150 dated two weeks from now. They give you $1,000. You just paid 15% interest on a two week loan, not a bad investment for the loan center. Frequently, the lender generously allows you to make interest only payments. So you pay your $150 dollars every two weeks. Four months later, you've paid $1200 and still owe the $1,150. These modern day loan sharks have come under scrutiny for unfair practices, including targeting minority groups.

PAWN SHOPS

Although they've been around longer, pawn shops use the same predatory tactics used by the payday loan industry, except the borrower pays up front with property. He or she brings in something of value. The pawn shop knows the borrower is desperate, so they lend far less money than the object is worth. If the borrower wants the object back, he or she must pay back the loan at an exorbitant rate, up to 20% per month, plus fees. If he or she doesn't pay it back, the pawn shop sells the item to recoup the cost of the loan, plus a substantial profit.

GET RICH SCHEMES

Get rich schemes prey upon the gambler's mentality of getting a lot for a little. They often take the form of miracle products, guaranteed investment returns, incredible claims, pyramids, or ponzi schemes. If it seems too good to be true, it probably is.

CREDIT CARDS

Credit cards have become essential for reserving hotels, airline tickets, or car rentals. Credit card companies have made it easier for just about anybody to get one, and for good reason. A credit card is simply another type of unsecured loan charging high interest. Credit card companies prey on the financially illiterate and economically inexperienced. For example, making minimum payments on a thousand dollar credit card purchase can take up to 12 years to pay back.

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