If you need money fast, there are a variety of borrowing options. But below are six types of loans that you should stay far away from. All of them come with very high interest rates and fees, and some of them can even harm to your credit.
You may also hear these loans referred to as cash advance loans or check advance loans. The idea here is that the borrower will pay the lender back when they get their next pay check. In reality, these loans generally last for 30 days or less.
The way it works is that when the borrower gets the money he or she will give the lender a post-dated check for the amount owed, including fees and interest. The check will be not be deposited by the lender until the agreed upon date.
The type of individual who would be attracted to a payday loan arrangement would be someone who has poor credit, can’t qualify for a credit card, or has a low income.
Suffice it to say, the interest rates can be crazy high. Let’s say you want to borrow $200 and pay it back in a week. The lender might charge you $33 in interest for the privilege. Now you might think that’s a reasonable amount. But on an annualized basis, that comes to an effective interest rate of over 850%.
Consumer Finance Company Loans
These are companies that specialize in loaning money to people who have bad credit or are in desperate need of money. This can be a very scary proposition. Many of these companies are nothing more than loan sharks.
When getting one of these loans, expect to pay annualized interest rates that are through the roof.
In addition, the lender may lull you into thinking that the loan is unsecured, meaning that you don’t have to put up any sort of collateral as a condition of getting the loan. But they are counting on you not reading the small print. That’s because buried somewhere in the details of the loan agreement is language that would allow them to take ownership of your property if you don’t pay up. It could be your furniture, appliances, or something else.
Advance Fee Loans
As the name implies, this involves a lender who charges an upfront fee for giving you a loan. This fee could easily be a couple hundred dollars or more. But that’s just the start of the ugliness.
Many of these lenders are scam artists. So after you pay them an initial fee, they may come back again requesting more money before the loan can be approved. Once they think they’ve milked enough money from you, they’ll disappear.
Now, if the lender does in fact approve your loan, it’ll have a very high interest rate attached to it.
Pawn Shop Loans
Need money fast? Well, some people take their personal property to a pawn shop where the item will be used as collateral to get a loan. The item could be anything of value such as a watch, musical instrument, jewelry, etc.
The owner of the pawn shop, also known as the pawn broker, will assess the value of the item, and how much they think it could be sold for if the owner never shows up. So the pawn broker has to weigh things such as the condition of the item, and supply and demand for it in the marketplace.
But as you might expect, the person who owns the item isn’t going to walk out the door with a big pile of cash. It wouldn’t be unusual for a pawn broker to give the individual $100 for an item that is worth $1500.
If the owner doesn’t return to claim the item and pay back the money, including fees, it will become the property of the pawn shop.
Pawn shops are regulated, but depending on the state, you could still be paying annualized interest rates on loans that can range from 15% to 300%, plus other fees.
The one good thing about pawnshop loans is that they won’t show up in your credit file, unlike some of the other loan types.
Tax Refund Loans
This is a loan that someone would get in advance of receiving their income tax refund. So, it’s not surprising that these loans are primarily associated with income tax preparation companies. After all, they know exactly how much the refund will be.
This is a great situation for the lender because the refund is almost guaranteed to happen. But even though they know they’ll get their money, they will nevertheless charge the borrower exorbitant fees and interest that eat up a big chunk of the refund amount.
Car Title Loans
When someone applies for a car title loan, it means that they are willing to turn over their car title as collateral. So to get this type of loan the borrower must own the car out right. The lender will place a lien on the vehicle and give the borrower the agreed upon funds.
If the borrower repays the loan, the lender will remove the lien and return the title. If the loan is not repaid, the lender has the right to repossess the vehicle and sell it.
Again, like the others, this type of loan is loaded with fees and high interest charges.
It’s clear that these are highly undesirable loans. So the best advice is to create and follow a household budget that will allow you to live below your means and save a little money each month. The loans discussed above are designed to take advantage of people who are desperate or don’t control their personal finances. Just do your best to avoid being in a dire situation where one of these loans is needed.