Published in: Banks | Jan. 2, 2020

The 3 Most Expensive Ways to Borrow Cash -- And 3 Better Alternatives

By:  Kailey Hagen

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If you're going to borrow money, do it wisely.

You have many options when it comes to borrowing money. Each has its own terms, interest rates, and qualification requirements. When you need cash, you may be tempted to go with the option that gets you money the fastest, but sometimes, this can be a costly mistake. Avoid the three most expensive ways to borrow money below and try some of these more affordable alternatives instead.

The three most expensive ways to borrow money

Payday loans, auto title loans, and credit card cash advances are three of the costliest ways to borrow cash. Here's why.

A young couple signing up for a loan and shaking hands with a bank representative.

Image source: Getty Images

1. Payday loans

Payday loans are popular among individuals with poor credit because they give you cash quickly and they don't usually require a credit check. The problem is that the interest rates are astronomically high -- in some cases, more than 500%. Plus, the loan terms are only for a couple of weeks, so you don't have much time before you need to pay back an amount that's much more than you originally borrowed.

To put this in perspective, consider a $250 loan with a 400% interest rate and a one-month repayment term. At the end of that month, you'd owe $333.33. If you didn't have a spare $250 in the first place, it's unlikely that you'll be able to afford to pay the original $250 plus $83.33 in interest one month later. That's why many people end up taking out new loans to cover the old ones and the cycle continues and the interest grows exponentially.

2. Auto title loans

Auto title loans are similar to payday loans in that they have short loan terms and don't require a credit check. Basically, you surrender your car's title to the loan provider in exchange for a certain amount of money, usually up to 25% or 50% of the car's value. You must have equity in the car in order to do an auto title loan and some companies require that you own the car outright. 

These loans can have interest rates of 300% or more, so you end up in a similar situation to people who've taken out payday loans. If you cannot pay back what you borrow, your lender may offer to roll over your remaining balance into a new auto title loan, or they can legally repossess your vehicle. 

3. Credit card cash advances

Credit card cash advances are when you withdraw cash using your credit card. Cash advances often accrue interest at a higher APR than regular purchases -- and even regular purchase APRs can sometimes be in excess of 30%. Cash advances usually have a fee associated with them, often a percentage of the amount that you're requesting. You can find all of this information out by reading your cardholder agreement.

While this is a much better deal than payday loans, it can still lead to debt you carry around for months or years. Those who take out multiple cash advances or charge a lot to their credit cards might see their debt problems get worse instead of better over time.

Three better alternatives

If you need money, it would be better to save up for the item you want to buy, borrow from friends or family, or take out a different, more affordable type of loan.

1. Save up on your own

When time is not of the essence, your best option is to sock away a small amount of money from each paycheck into a savings account toward the item you want to buy. That way, you don't have to worry about borrowing money from anyone. If circumstances change -- say your old car dies before you've saved up the money for a new one -- you might still have to borrow money, but it won't be as much.

This strategy probably won't work if you need money quickly, and it may require you to make some adjustments to your budget, like cutting back on discretionary spending. But it's certainly more affordable than borrowing money.

2. Borrow from friends or family

Friends and family may be more flexible than a bank or credit union when it comes to giving out loans. Some might not even charge you any interest. This is an option worth exploring if a friend or relative has some spare cash, but you should both understand that there's more than money at stake. If you fail to pay back what you owe, you risk permanently damaging the relationship, so you should only do this if you are confident that you can pay them back.

Before you take any money, you should sit down and discuss how much you'll borrow and at what interest rate, how much you'll be expected to pay per month, and what you'll do if you're not able to keep up with your payments. Get all of this in writing and make sure each person has a copy so you can refer back to it later if need be.

3. Take out a more affordable type of loan

If you are able to take out a mortgage or an auto loan to buy a home or car, these are much more affordable than payday or auto title loans. The average interest rate on a 30-year, fixed-rate mortgage is less than 4% and the average auto loan rate is less than 5%. Your balance will accrue interest much more slowly, making it easier to pay back.

A personal loan is a little more expensive than a mortgage or car loan because it doesn't involve collateral, but interest rates rarely exceed 30% and can be much lower for those with good to excellent credit. Plus, you can use these loans for almost anything. They are broken into regular, monthly payments so you don't have to worry about accruing interest indefinitely as you might with a credit card cash advance.

Explore all of your options before borrowing money to see which is the best deal. Start with the three alternatives here -- and avoid payday loans, auto title loans, and credit card cash advances at all costs.

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