Avoid These Worst Ways to Borrow Money

With tough times getting even tougher, it is likely that at some point you’ll need to borrow to fill specific financial gaps in your budget. This is evident, especially in the last few years with Americans taking on more debt to make ends meet.

The Pew Charitable Trust did a survey on family finances in America and the results were shocking. Around 80% of American families have some kind of debt and only 46 percent of this number were able to make more than what they spend.

While borrowing might be inevitable, it is important to choose lenders with favorable interest rates and fees because some types of borrowing can hurt you further. Here are some of the worst ways to borrow.

Credit Cards

This is the most common and most expensive way to borrow. First off, because the card issuers charge a higher interest rate than other lenders, walking around with a credit card is almost like a time bomb waiting to explode.

According to Experian’s annual study on the state of credit and debt in America, the credit card balance of the average American stands at $6,375. This is due to high-interest rates, which stand at an all-time high of 17 percent.

To manage credit card debt, make purchases with them only if you can clear the debt when the end of the month approaches.

Payday Loans

These are small loans issued based on your paycheck. The disadvantage of this type of loan is the high-interest rates charged on the amount. By high we mean that you are looking at $15 for every $100 for a two-week loan. This translates to a yearly APR of around 400%!

The payday loans will be paid in full using the next paycheck. However, borrowers can repay the loan amount in installments or even pay a certain fee to move the due date. This postponement is called rolling over or renewing a payday loan, but it increases your costs dramatically, so as much as postponing gives you room to breathe, you can end up paying more in the long run.

Car Title Loans

To get these loans, you need to hand over your car title to the lender, that is, if the car is still valuable. The lender will then hold on to the title until you repay the loan.

This is an easy way to take out a small loan of up to $5,000, but this one also comes with high-interest rates and fees. Some as high as 25%, which means if you take out a loan worth $1,000 for 30 days at this rate, you’ll pay back $1,250 in interest.
Since the loan is due in 30 days, if you delay payment, the lender might seize your car or renew the loan. The latter seems to be on many lenders’ agenda, according to the CFPB study that revealed that 4 out of 5 car title loans are renewed on the same date the loan is due since the borrower couldn’t repay the loan in full at one go.

Pawn Shops

At pawn shops, you’ll get a loan after you leave something valuable enough to cover the loan as security. This type of borrowing is fast and is familiar with borrowers who have an urgent need that can’t wait for more than a day.

For those with poor credit, this is beneficial since the pawnbroker doesn’t run any credit checks. After all, you already secured it. If you don’t pay up, your security is sold to recover the loan amount.

While this may be a fast way to secure a loan, the interest rates and fees involved make this type of borrowing one of the most expensive. Some of the fees involved include ticket fee, storage fee or even a fee should you lose your ticket.

Home Mortgages

These loans target those with home equity, but don’t have the income to enable them to take out a mortgage the conventional way. In the past, before house prices started taking a crash, borrowers could take out loans from banks using their homes.

However, after the Great Recession, many borrowers were left counting losses. In addition, banks today have tighter requirements that make it difficult to put your house on the line for a loan.

Many borrowers use the refinance option to tap some equity from their houses. This option means refinancing your existing mortgage and taking out a bigger one. You can make one lump sum withdrawal of the loan at the certain interest rate for a period of between 5 and 15 years with the rates varying between 5 to 6 percent.

One downside to these loans is if you keep re-financing the loan, the loan amounts will accumulate until you sell the house or die. The accumulated interests and the fees can drain the home’s equity and can also lead to a situation where the home’s value is less than the mortgage.

Borrowing from 401 (k) s

401 (k) loans should be out of reach, according to many financial experts, but federal law permits workers to take out a loan with a maximum of 50 percent of their existing account balance and a maximum of $50,000.

You’ll then have a repayment period extending up to 5 years with low-interest rates compared to other forms of borrowing like credit cards.

While the interest rates might be attractive, borrowing from your retirement plan isn’t a good idea. This is because you’ll spend more replacing the amount borrowed instead of saving towards your retirement plan, thus missing out on goodies like interest income, dividends and capital gains during the loan repayment period.

What’s more, should you quit your job or get fired, you’ll be required to pay back the loan within 90 days.

Personal Loans

Otherwise known as unsecured personal loans, these nation21loans don’t require you to put up any collateral or security against the loan you take out. This makes it a common consumer loan for many borrowers.

There’s a catch though. Since there’s no collateral, the interest rates involved are high and on top of that, these loans are due in a short period, ranging from a year to five years.

Conclusion

Sometimes, borrowing is the only alternative. But in light of the previous modes of borrowing, it is vital for you to review the associated interest rates and fees before borrowing, so that you can skip past the dangers involved.

Furthermore, predatory lenders are waiting to pounce on you and in the long run, you’ll end up in a worse financial situation than before you took out the loan.

FG Editorial Team
The Founder's Guide Team - Asian Associates with dynamic elements out to make a change.Thank you for visiting our site! If you do have any questions or inquiry, feel free to contact us through our links and please don't forget to follow our social media accounts. It would be our pleasure to help you in any way we can. Always Remember: "Proceed to Succeed". Hoping to hear from you soon!

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