Loans, credit cards, and borrowing money in general can sometimes be risky—after all, for many Americans, borrowing too much is what leads to an overload of debt. However, it’s important to understand that not all loans are created equally; it’s also a good idea to identify the real reason why you’re borrowing money to begin with.
Every consumer has his or her own unique reason for taking out a loan. In many situations, they need to finance a large purchase that they don’t have the cash for, such as a home or to pay for college. Other times, a consumer may need to borrow money in order to take care of important bills and other expenses. Desperate times can cause for desperate measures, and this might mean taking on a loan without understanding the terms you are agreeing to—and therefore, potentially making your situation even worse.
Due to extremely high interest rates, strict repayment deadlines and other unfavorable terms, the following are the types of loans you should try to avoid if you need to borrow money:
Car title loans
Car title loans are very risky, secured loans that will use the borrower’s car as collateral. If the borrower is unable to pay back the loan on time—which is a very realistic possibility due to the very high interest rates—the lender has the right to keep the borrower’s car. Not only are these very expensive loans, but putting your vehicle on the line makes them extremely risky as well. Losing your car can be a devastating financial loss, especially if you rely on your car for transportation to and from work.
Payday loans are often quite easy to obtain, regardless of credit score—all a borrower needs is a steady paycheck. Lenders will first verify that borrowers do, in fact, receive direct deposits on a steady basis. The biggest problem with payday loans is that the interest rates are extremely high, making it difficult for many borrowers to pay back what they’ve borrowed on time, and often have to borrow more money—thus getting stuck in an endless cycle of debt.
Pawnshop loans are another risky type of secured loan, and will require that a borrower leave behind something of value (such as jewelry) as collateral. Failing to pay back the loan on time will give the pawnshop the right to keep the item and resell it. This can mean losing something of significant monetary value, sentimental value, or both.
When people turn to risky loans, they are often in a tough financial situation, but certain types of loans can make things even worse for someone who is already struggling financially. Before taking out a risky loan that can cost you a lot more than you bargained for, explore your other options first. For example, if you’re receiving long-term annuity payments, you may have the option to receive your money sooner and in one lump sum. Whether you have bills to catch up on, expenses to take care of, or there’s a large purchase you’d like to make, receiving your money sooner can help. You could also explore your other loan options, such as personal loans with reasonable interest rates and favorable terms.
Nothing above is meant to provide financial, tax, or legal advice. You should meet with appropriate professionals for such services.