Do not take out a personal loan even in an emergency

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The 800,000 federal employees who are asked to work without pay or stay home during the record-breaking government shutdown are feeling the pinch: so far, each of them has missed an average of more than 5,000. $ salary, reports The New York Times.

For many workers, this is “an emergency,” says Suze Orman, personal finance expert. That’s why it gives those involved permission to consider breaking a key money rule and borrowing from a retirement account.

But no matter how strapped for cash you feel, there’s one option she’s begging you to keep banned: a payday loan.

“I beg you all, don’t take out a payday loan,” she said in a special episode of her “Women and Money” podcast for federal employees affected by the shutdown. “Please don’t. If you do, it will be the biggest mistake you’ve ever made.”

What is a payday loan?

Also known as cash advances, payday loans are typically small loans – typically $ 500 or less – which, depending on where you live, may be easy to obtain. You normally owe the loan balance, plus service charges and interest, two weeks later, the next pay day.

The problem with payday loans is that they are often incredibly expensive: the national average annual rate (APR) for a payday loan is almost 400%. To put that into perspective, the average credit card APR is currently 17.47%, according to CreditCards.com.

Because the terms of these loans can be difficult for borrowers, some states prohibit them outright or have regulated them, for example, by instituting laws that limit the APR to 36% or less. But most states still allow high cost payday loans.

Orman isn’t the only expert who says that while you can get a payday loan, it’s probably a bad idea.

As Michelle Singletary, personal finance expert and columnist puts it, “payday lenders are sharks” and payday loans are a “horrible” business model for most people.

And, as data from the Consumer Financial Protection Bureau indicates, as practical as a solution it may seem at the time, payday loans are unlikely to solve your problem: “More than four out of five loans are re-borrowed within a month, usually just on or shortly after maturity.

In addition, “nearly one in four initial payday loans is re-borrowed nine or more times, with the borrower paying a lot more in fees than he received on credit.”

What are your other options?

Here are safer ways for federal employees to get the money they need, according to Orman:

  1. Maximize your credit card, but make a commitment to pay off your balance in full as soon as you receive your salary arrears and start receiving your regular paycheck.
  2. Withdraw your original contribution from your Roth IRA. You can usually withdraw the amount you originally invested without having to pay taxes or penalties.
  3. Take a loan from your savings plan (TSP). If you are eligible to borrow from your TSP retirement account, you can usually do so without paying taxes or penalties. Note that you must repay yourself, plus interest, within one to five years.

You can also try PayPal: The company recently announced that it will offer one-time, interest-free cash advances of up to $ 500 to federal employees affected by the shutdown. The company will fund a total of $ 25 million in cash advances for the program.

Other smart steps you can take include calling your creditors – for your mortgage, car, or credit cards, for example – and telling them you’re not getting a paycheck. Ask for an extension, says Orman, “Because remember, if you’re late with your payments, it counts towards your credit score. “

And in the meantime, she says, watch your spending: “Every penny should be spent on something you need,” which means skipping extras like movies and dining out for the time being.

“These are ways for you to access money that you maybe have that you didn’t even know,” she says, who “hope this could help you”.

Don’t miss: Suze Orman Says Federal Employees Are In An Emergency And May Consider Breaking Key Money Rule

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