If you have already set your sights on getting a loan, the benefits of getting your hands on cash can often cloud your judgement on what you are actually paying for it. But whatever types of borrowing you eventually go for, you would want to avoid the ones below as you can easily find alternatives that offer way better terms than they do.
These loans are often for small amounts ranging from $100 to $500. And because they are insignificant numbers, borrowers tend to neglect realizing that their interest rates are very significant. What typically happens is that at the point of approval and disbursement of funds, you will write a post-dated check to repay the lender. It will be dated on your payday or a day after that. For a $500 advance, you could be charged a $20 fee. Pretty fair looking deal if you look at it…
Until you calculate that that $10 is 4% of $500. That is way above the rates that traditional bank will charge you. And that is just for the number of days that you had owed. For simplicity sake, let’s just assume that you took a full month borrowing period. That means that you are paying a whopping annual rate of 48%! That could be beyond anything that you could ever comprehend. And we are using very prudent numbers here.
Mortgagers can actually grant you a loan amount of more than what your house is worth. Which adds to the notion that real estate are the most valuable assets anyone can accumulate. There are not many other types of assets that can be loaned against more than what it is worth.
These of course come with a price. You can expect huge front end fees plus interest rate higher than a typical mortgage. You could run into problems selling the house and trying to file for tax deductible interest charges.
This is associated with the title of your car. You basically pass the title to the lender together with a set of car keys. If you are unable to repay the loan within the agreed time frame, the lender have the right to take your car. These types of lending target the desperate and you can expect the lender to prefer you not paying rather than paying. Your car can be worth much more than what you borrowed. See a conflict of interest here?
Direct deposit advance
This is something like getting an advance on your pay. Just that the advance is granted by a bank. And they charge you an interest for your own money. Sounds weird? There’s more. The interest rates are likely short term. For example $10 every 5 days. The longer you take to repay the money, you will soon pay more interest than the principle. You are better off borrowing from your mother if the amount you are seeking is a small one for a short period of time.
More and more retailers are using rent-to-own schemes to sell big ticket items. Massage chairs, sofa sets, refrigerators, etc. You name it. It is appealing to buyers who are concerned with cash flow rather than logic. You basically pay a small “rental” for a specific period of time. At the end of which, you will own the item outright.
For example, you could buy a $1000 item for a monthly payment of $50 for 36 months. $50 does not look like a lot of money. You can tick it off your salary each month. And you can offset that with the annual salary increments that you are expecting from your employer. But surely you can see that you will be paying a total of $1800 at the end of it. That comes up to an annual flat rate of over 25%. Still think that is a smart move?
Pawning is probably the oldest for of borrowing known to man. The concept is so simple. You use something of value to exchange for an amount of funds in relation to what the item is worth. You will then have to repay the loan with interest. At the end of it, you will get your valuable items back. Items that are commonly pawned include expensive watches, diamond rings, gold necklaces, etc.
The reason why so many people prefer this form of borrowing is that they do not have to repay the money if they are willing to part with their valuables. This totally turns the dynamics of borrowing inside-out. Very often, people just take the money and leave without ever coming back to redeem their valuables, resulting in a very happy pawn shop manager.
Interest on these types of loans, as you can expect is higher than what is available from a typical personal loan. If you treat this transaction as more of a sale rather than pawn, you could be better off selling your stuff via auctions or to a genuine collector.
Debt consolidation loans
These service providers do serve a useful purpose. They help clear all your debts, freeing your credit from the shackles of 5 credit card debts. But you surely must expect that they come with very tough rates as well.
Most of the time lenders advertise themselves as lowering your payments. That could be true. But usually you are getting lower payments because of a longer loan tenor. The time stretch lowers your instalments. But you could be paying much higher rates than what you are previously on.