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People who accumulate debt often find themselves in a debt crisis being unable to obtain a loan and having all expensive and short term debts due. The risk of default and bankruptcy is latent and avoiding it is crucial. 401k can provide the necessary funds to cancel all debt and with the loan payments reduced to a minimum, the path to debt freedom begins.
Here is a common story: My friend, Nick, is badly in need of money but can’t get a loan. He has several payday loans that he can’t pay off. He has been trying to pay them back for a long time now, but due to lack of money he is just able to renew them. He wants to cash out his 401k. That way he’ll have enough money to pay off the payday loans. And he’ll even have enough money every month to put back in his 401k plan.
He has learnt his lesson the hard way. He is sure he never wants to get involved in payday loans ever again. You might also be in a situation of cash crisis and wondering what to do. Before you decide to go for payday loans, get to know what it’s all about.
Costly Cash
Payday loans are also known as cash advance loans, check advance loans, post dated check loans or deferred deposit check loans. They have been referred to as ‘costly cash’ by the Federal Trade Commission. There are over 10,000 big and small lenders dealing in payday loans, and as per an estimate they earn more than $2 billion a year in terms of fees and interest.
The procedure for getting a payday loan is very simple. You just need to write a check for the amount of the loan that you want, plus a fee. The amount of the fee depends on the amount of the loan. Most of the loans, including payday loans, are governed by usury laws. These laws limit the amount of interest that can be charged on a loan. Surveys revealed that payday lenders charged interest ranging from 390% to 871%. The average APR was found to be 474%. In spite of the federal Truth In Lending Act, most of the payday lenders don’t want you to know the exact amount that you would be paying. In the survey, only 37% of the lenders quoted an accurate Annual Percentage Rate.
Last Resort
It’s a known fact that people go for payday loans only when they have failed to arrange the money from every other source. Even a cash advance on a credit card would cost them less. A cash advance on a credit card would cost you somewhere between 35% and 50%, which is obviously much better than paying more than 400% APR.
Instead of payday loans, borrowing from your 401k plan would be a better idea. It would provide you with instant money for your need, and allow you to pay it back through payroll deduction. You need to speak with the human resources department of you organization to find out more about a 401k loan. The best part about a 401k loan is that money borrowed is not subject to tax penalties. Also, it won’t be added to you income for tax purposes unless you repay the loan.
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