As a consumer, you may run into other loans designed to help you make big purchases or borrow money in a hurry — payday loans, car title loans or in-store financing on things like furniture and electronics, for example. These may be flexible options for taking out cash or paying for big items, but generally they are bad idea.

They usually have high interest rates — and can have very high fees and charges tacked on top. They are especially dangerous for anyone living paycheck-to-paycheck or just trying to make ends meet.

What loans should I avoid?

When you take out a high-interest loan you get stuck with payments that, over time, can be very hard to manage. The reason is that consumers typically use these loans because they’re out of money and looking for any alternative. These loans provide some cash right away, but then immediately tack on interest and costs — which means you need to come up with even more money relatively soon to pay them back.

Our recommendation with these loans is stay away from them. Establish a relationship with a trusted bank and deposit your money there. Create a budget and a spending plan that will allow you to save up money for big purchases, to have an emergency fund and to save for the future. That way, you won’t get stuck in a situation where you need to take out high-interest loans.

• See also: Budgeting, Emergency funds, Saving

If you’re stuck living paycheck-to-paycheck and it’s hard to make ends meet, take time to look very carefully at your spending habits. Where is your money going? Is it going to necessary expenses — things like utilities, basic groceries, basic clothing, an affordable car or public transportation, health expenses, rent or a mortgage — things you have to pay for? Or is it going to extras — expensive clothes and accessories, a luxury car, home decorations, electronics and media, restaurants, movies and other extras.

If you spend a lot on things you don’t need, you need to cut back. If you don’t, but you still can’t cover the basics, then you may need to make bigger lifestyle changes, like taking on a second job or moving into a less expensive home. Your goal is to make small changes until you are able to cover your everyday living expenses with your income.

Spend less than you earn — it’s the first Essential rule to managing your life and your money. It may not be easy, but if you stick to it you’re more likely to succeed and have a healthier relationship with money in the long run.

What are some common types of high-interest loans?

Here are some types of loans that have attractive features and may seem like a good deal in the short-term. They can harm you by putting you in a very difficult financial situation.

Payday loans

Payday loans are designed to give you a short-term loan until your next paycheck — but they can get you into big financial trouble. When you take out a payday loan, you write a post-dated check (a check with a later date) to the payday company or lender for the amount of the loan plus a fee, which is usually $15 to $20 for every $100 borrowed. That is an extremely high interest rate — more than most people pay to borrow money for an entire year.

Payday loans are designed to give you a short-term loan until your next paycheck — but they can get you into big financial trouble.

The lender gives you the money and agrees to wait a short period of time, typically two weeks, for you to repay the loan. If you don’t pay it back, the lender cashes your check. As a borrower, you can extend the loan again, called "rolling over," but you are charged another fee each time you roll over your loan. Do this a few times and you could quickly owe more than double the original amount you borrowed.

All these fees and charges add up to a ton of money — money that you could be spending on something else or saving for the future. Every state has its own regulations, so the fees vary depending on where you live. In general we recommend you stay away from payday loans.

Payday lenders often also offer check cashing, which is another way to get cash instantly. Check cashing is not a loan. You take an actual check you received — a paycheck, a student loan check or another kind of check — and cash it on the spot. It’s often offered at the same place as payday loans and also has high transaction fees.

We recommend that you avoid both payday loans and check cashing. Instead of wasting your money on the fees you pay, use it for something else. The best thing to do with your money each month is to deposit it into an account at a bank. There, you can cash checks for free and use the bank’s online tools to help you manage your income and your expenses.

Car title loans

A car title loan is another dangerous loan. When you take a car title loan, you go to a lender and sign over the title of your car in exchange for cash. The title of your car is what the lender uses to secure the loan. Typically, you have to pay these loans back in 30 days, including the amount you borrowed plus a lot of interest. If you don’t pay them back in full, the car title lender can repossess your car.

Car title loans usually have extremely high interest rates — often as high as 250% annually. A credit card, on the other hand, typically has an interest rate range between 7%-36%.

In every possible scenario, car title loans are a bad idea. We recommend you stay away from them unless you want to risk being in deep debt and possibly losing your car.

401(k) loans

Most 401(k) plans have an option that allows people to borrow from their retirement plans. As with other bad-loan options, most people turn to 401(k) loans when they’ve run out of other alternatives (it’s unusual to have “too much” saved for retirement and borrow money out for that reason). And that can set you up for some problems.

When you take out a 401(k) loan, you have to pay it back within a time period or you risk having to pay taxes and other penalties. You also have to pay interest on that money If you leave your job or are let go, you typically need to repay the loan immediately.

Both of these repayment scenarios have something in common — they require that you repay the loan, plus interest, at a time you may be financially stressed. And if you don’t come up with the money, you get a surprise tax bill on top of it all. You can see how a 401(k) loan can spiral into a financial problem. Given these risks our general recommendation is: Don’t borrow money from your retirement savings.

Don’t borrow money from your retirement savings.

Instead of borrowing money from your retirement savings, create a budget and stick to a spending plan — and use savings as a way to build money to cover things you need and want. And if things are really dire and you’re considering tapping your 401(k), consider talking with a bankruptcy attorney first. Your 401(k) should make it through bankruptcy and it might be better leaving the money alone, even if doing that pushes you into that process.

Rent-to-own loans or in-store financing

We see the ads on television all the time, making the rent-to-own and in-store financing industry a big business today. In rent-to-own, a company leases electronics or furniture to consumers over a set period of time, usually 12-24 months. As the renter, you get stuck paying weekly or monthly rental fees and interest. In in-store financing, usually found at furniture stores or places where you buy electronics or appliances, you purchase the item and pay for it in installments for a set period of time. You also have to pay interest on the financing. Over the life span of these loans, you can end up paying a lot of interest above and beyond the value of the item you bought.

The biggest downfall of these loans is that you end up paying way more for an item than it is worth. Most material items you buy lose value the minute you purchase them. But, when you finance them, you end up paying the full price plus high interest.

Don’t get stuck paying these kinds of loans. Instead, take the time to save up for what you want. Plan ahead — a few months to a year — for big purchases and start putting money into savings. Buy only after you have money in your account to pay in full. That way, you never get stuck wasting money on interest.

• See also: Save for a goal tool

Refund anticipation loans

A refund anticipation loan (RAL) is a cash advance that your tax preparer gives you, so you don't have to wait for your tax refund to come in the mail or via direct deposit.

We don’t recommend using a RAL. The problem with them is that you end up paying high costs for that small convenience — so high that they've been investigated by several consumer-protection agencies. Instead we suggest waiting for your refund to arrive. If you find yourself in a situation where you are relying on that refund money, take a look at your budget and spending plan and try to adjust your expenses so that they are less than your income. And if you find yourself regularly getting big tax refunds, consider adjusting your withholding.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Links we like

Here are a couple online features you might find useful:

• Federal Trade Commission (FTC): www.ftc.gov

• Center for Responsible Lending:
  www.responsiblelending.org/payday-lending

• Employee Benefits Research Institute: www.ebri.org

• Consumer Federation of America: www.consumerfed.org