The most basic type of loan is a pawn – you sell your item to someone, and you have the opportunity to buy it back within a certain time frame for a certain amount extra. Unfortunately, not all loans are this simple.
They vary in interest rates and a slew of other metrics. We can’t go over every type of loan that exists – that would take us far too long, and you’d be bored to tears. But we can go over the worst types of loans to take out – we’ll tell you what they are and why you should never take one out unless the circumstances are truly dire.
#1 – Payday Loans
The concept of payday loans seems innocent enough – you need money before you get your paycheck, so you take out a payday loan to address the concern, and then when you get paid, you pay off the loan.
However, the risk is absolutely enormous – payday loans often have interest rates that are through the roof. Even if you pay the loan back a month or two late, you may end up paying double (or even more) what the original loan was for.
And payday loans (in most states) are pretty shady – According to this site, the majority will require you to put up the title of your car as collateral. Many have clauses saying that if you don’t pay back a certain percentage within a certain time, they legally own your car.
The only good thing about payday loans is that they’re easy to get. But realize that the people who offer payday loans are hoping that you won’t be able to pay it back right away – if you don’t, they make a ton of money, or they get your car… regardless of if it’s worth more than the loan amount itself.
Verdict: only take out a payday loan if you are 100% sure that you will be able to pay it back when you promise to. If you don’t, you’ll suffer the consequences. And you might even lose your car.
#2 – Treating your credit card as a loan shark
If you have a good credit score, you can get a credit card that has a credit limit in the five figure range. Many people with these credit cards use them as loan devices – as in, they pay for something big on the credit card, and convince themselves that they will pay it back in a reasonable timeframe.
This mindset is toxic – credit cards weren’t made for this purpose. If you notice the interest rate on yours, it’s probably pretty exorbitant – by taking out a “loan” with your credit card, you have essentially committed to some of the worst rates in the industry. These rates will continue to haunt you until you pay the loan off.
Verdict: never use your credit card as a loan tool. You will be up to your eyeballs in debt, and credit card companies are notoriously ruthless when it comes to collecting on debt.
#3 – Unnecessary auto loan debt
What would you rather drive – a brand-new Ford Mustang, or a 2002 Honda Civic?
Probably the Mustang. Most people would answer that. But at the same time, most people can’t afford a Mustang – this leads to them taking out car loans when they don’t need to.
Take your total budget and factor in a car payment that’s in the hundreds of dollars. You’ll probably have to cut corners elsewhere in your life, and you’re only driving your car for a certain amount of time per day. On top of that, you can’t get out of a car loan without paying a massive cancellation fee.
Verdict: unless you’re confident in your income, stick with an older car. Pay in cash, and you won’t have an unnecessary loan in the tens of thousands of dollars looming over your head.