What You Didn’t Know About Home Loans

A home loan, otherwise known as a mortgage, enables you to purchase a house without paying the full price out of pocket at the time of the purchase.

For most people, buying a home is the biggest financial transaction of their lifetime. For that reason, if you’re in the market for a new home, it’s best to learn all you can about home loans and how they work before you get too deep into the process.

Here are some things you may not know about home loans:

Rates fluctuate daily

Borrowers who are eager to secure a home loan with a low interest rate may get into the habit of checking mortgage rates as often as some people check the weather. Interest rates fluctuate every day, which means the rate you see today may be different than the one you see when you actually are approved for the loan.

The cheapest interest rate does not guarantee the cheapest loan

When choosing a lender, borrowers will often choose the one offering the lowest interest rate, but this can actually be to their detriment. There are other factors to consider, including closing costs and the lender’s policy on releasing equity for a line of credit or a loan. Also, in adjustable-rate mortgages (ARM), the loan featuring the lowest interest rate may not have the lowest rate a few years down the line and may actually cost more in the long run.

A fixed-interest rate mortgage can ultimately cost you more

When interest rates are low, many home-buyers choose a mortgage with an interest rate that is fixed throughout the life of the loan, believing it is the most cost-effective choice. This may or may not be correct. A fixed-rate mortgage might comes with higher exit fees, or fees paid to the lender when the loan is repaid. Also, if rates drop further throughout your loan’s term, you won’t be able to take advantage of the new rates unless you refinance. Finally, interest rates on fixed-term mortgages are generally higher than the initial rate on ARMs.

A lower credit score can cost you tens of thousands of dollars in interest

Most people know that a higher credit score is generally awarded with a lower interest rate, but not many people know to what extent this is true. A high credit score can translate into tens of thousands of dollars in interest payments over the life of a home loan. A credit score difference of 100 points can increase a monthly mortgage payment by $150 or more, depending on the size of the loan and the interest rate.

If you’re thinking of applying for a home loan soon and your credit isn’t in the “very good” category (higher than 740), it may be worthwhile to spend a few months working to boost your score before you apply for a mortgage.

The housing market impacts rates

While the federal funds rate will have the greatest impact on the rise and fall of interest rates, the state of the housing market will affect it, too.  Lenders need to turn a profit from their loans, which means the higher the volume of loans they process, the less they need to earn from each one to remain profitable. Consequently, when the housing market is booming and lenders are granting loans on a frequent basis, they will be more inclined to offer lower interest rates to borrowers.

You can have your mortgage payments automated

Your home loan payments will likely be your largest monthly bill, and missing a payment or paying it late can have serious consequences. Fortunately, you can avoid these scenarios by signing up to have your monthly mortgage payments automatically deducted from your checking account. Most lenders provide this service; check with yours to see if this is an option they offer.

Buying a home will likely be the biggest purchase you ever make. Be sure to find out all there is to know about mortgages and their interest rates before applying for a home loan.

Your Turn: Do you have another lesser-known fact about home loans to share? Tell us about it in the comments.

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4 Reasons To Get Preapproved For A Loan

key fob with tiny car laying on top of auto loan paperwork with "Approved" stamped in large red lettersAre you in the market for a large loan-dependent purchase like a new home or a new set of wheels? Don’t forget to get your pre-approval first!

Here’s why
1. You’ll know what you can afford.
A pre-approval will tell you exactly how much house or car you can afford, simplifying and quickening your search.

2. You won’t get taken for a ride.
When you’re unsure how much you can spend on a car, the dealer may try to sell you one that costs more than you can really handle.

3. You’ll be taken seriously.
A car dealer or realtor will take you more seriously when you wave that pre-approval in their face.

4. Secure the rate and financing terms you desire.
When you’re making the deal for your purchase, there are bound to be some confusing moments as things come together. Some dealers use this as an opportune time to upsell warranties, insurances and other add-ons. While these things require consideration, it’s too easy to tack the costs onto a loan without considering how it will impact payment and overall cost.

Your Turn:
Based on your own experiences, why do you think it’s important to get pre-approved for a loan? Share your thoughts with us in the comments!

How to Know if You Need a Cosigner

A look into what a cosigner is, why you might need one and the risks serving as one presents

close-up of a person's hand as they are signing a legal documentLoans are an economic staple in most people’s lives; they can help pay for education, transportation or living arrangements. Of course, getting a good loan from the bank or some other financial institution can be quite difficult for some people. This is especially true for buyers who are just starting out and don’t yet have a sound credit score.

For these individuals, seeking out a cosigner might just be the way to go. A cosigner allows people to receive a loan or transaction they otherwise wouldn’t have access to. Being a cosigner can be quite risky financially, so it’s important to know exactly when you need to ask somebody to serve as one on your behalf.

What is a cosigner?
Investopedia defines cosigning as “the act of signing for another person’s debt which involves a legal obligation made by the cosigner to make payment on the other person’s debt should that person default.” While the person requiring the cosigner isn’t always in debt, a payment due is always involved.

In summary, a cosigner is someone who agrees to make payments on a loan if the primary recipient of said loan is unable to do so. Oftentimes, the person who takes out the loan is more than able to pay it back, but is unable to receive the original loan without someone else backing them.

By having someone serve as a cosigner, individuals can gain access to much larger loans than they would have been able to by themselves. However, the Consumer Financial Protection Bureau notes that interest rates are usually much higher for individuals with a cosigner.

When do you need a cosigner?
Justin Pritchard of The Balance explains that the most common reason people require a cosigner to receive a loan is due to their credit score. If the individual has a poor credit score and history, they will be unable to receive stronger loans without the guarantee that someone with a better credit score is backing them.

Several different transactions often necessitate the need of a cosigner. Some of the most common are purchasing a car and renting or buying a house.

A cosigner is not necessary for just any transaction, though. Consigners should be found for important financial endeavors that are required to meet basic needs, like the aforementioned lodging or transportation.

Who can serve as your cosigner?
The individual who signs up to be a cosigner is required to have a strong credit history more often than not. They should have enough money saved up and have a strong enough credit score that signing up to cosign shouldn’t negatively affect them. Nevertheless, simply by serving as a cosigner, they do run the risk of hurting that credit score. For this reason most cosigners are people close to the person applying for the loan. The Consumer Financial Protection Bureau notes that most cosigners are family members and most often parents.

Your lender does not designate who must be your cosigner, but will accept anyone who meets their credit standard and guidelines.

What are the risks of serving as a cosigner?
Signing up to be a cosigner is a decision that requires a lot of forethought. If something goes wrong with payments, it will be the cosigner’s responsibility to cover those payments. Cosigners are held to an equal amount of responsibility for paying the loan as the original person who applied for it. Despite this, Kristy Welsh noted in USA Today that lenders will often take legal action against the cosigner first if payments are not made, knowing that the cosigner probably has a larger, more reliable amount of money.

Your lender will provide your cosigner with a disclosure that summarizes their obligations.

Before you consider seeking out a cosigner, it’s important to consider whether the loan you are looking to sign up for is for something that’s absolutely necessary. Settling for a smaller loan might mean settling for a smaller home or car, but it often means that neither you nor your potential cosigner will suffer serious financial burdens down the road.

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Why You Should Avoid Personal Lending

A loan from a financial institution is best
Avoiding paperwork and getting low or no interest makes a loan from a friend or family member seem like a great idea, but the complications that arise in personal lending situations make them seldom worth the trouble.

Firstly, if the money is lent interest-free, that can create problems with below-market interest legislation. This is a big deal because avoiding interest is one of the main reasons people seek loans between family members. This is an issue because the IRS wants to ensure that people don’t try to get out of paying taxes on financial gifts by disguising them as loans. In order to remain in compliance with the IRS and make it clear that the transfer of money is a loan and not a gift, it may be necessary to calculate the interest that would hypothetically be paid on the sum at the current applicable federal rate (AFR), even if that interest is never actually paid. This is known as imputed interest.

“Then you get to pay real, live income taxes on the imaginary interest,” states Bill Bischoff of MarketWatch. “The imaginary interest payments can also trigger imaginary gifts from you to the borrower, which may eat into your valuable federal gift and estate tax exemption.”

There are differences in the ways that loans between family members are treated depending on whether the repayment is achieved through a set term schedule or it is considered a demand loan, which means that the lender may demand the money back at any time. The need to calculate imputed interest and make income tax payments on the interest is dependent upon the amount of the loan. Those interested in making a loan between family members should therefore talk to their tax professional to determine if below-interest tax rules may be an issue and if interest needs to be charged or imputed interest calculated.

While these legal and financial issues can definitely create their share of problems, the main reason to avoid lending between family members is the personal and emotional impact it can cause. Money owed between family members can cause tension in the relationships and even tempt people to avoid social interactions and family gatherings. If the borrower is not able to repay on a timely schedule, the relationship can be seriously compromised.

Furthermore, if the loan is for a new business or home, it may be especially problematic to get the money from a family member. When a family member lends money to cover a down payment or business startup costs, he or she may feel entitled to become part of the decision-making process, giving you input on how to run the business or which type of home is the best deal. People may do this because they feel their advice can make it more likely you will succeed in repayment, or because they feel their investment has bought them a stake in the home or business venture.

“One of the disadvantages of owing money to loved ones is that it may open up unwanted dialogue about your spending habits,” states April Maguire, writer for the QuickBooks Resource Center. “Whereas a bank won’t tell you to stop going out to dinner or discourage you from buying a new car, lenders who are also friends or family may criticize you for spending money on extravagances when you have yet to repay your debt.”

It can be hard to set up and maintain a clear separation between the financial agreement and the relationship when dealing with a personal lending situation. On the other hand, once a financial institution deems you worthy of a loan, it gives you autonomy to make your own business, home-buying and budgeting decisions.

Sticking with your financial institution helps you avoid all the hassles associated with personal lending and ensures that your relationships are never put at risk. Furthermore, it allows you to build a solid credit history with your timely repayments.

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The Dangers of Taking a Personal Loan to Finance Your Wedding

Consider the long-term costs of taking a loan to pay for one day of happiness

The cost of weddings has risen in recent years, leading to couples taking out loans or paying for items with credit cards. Yet starting your married life in debt could be a dangerous financial decision for more reasons than one.

Weighing the Costs
According to a survey conducted by renowned wedding resource site TheKnot.com, the average cost of a wedding in 2015 was $32,641. While some will gladly pay this amount for the wedding of their dreams, most Americans do not have enough money saved up to do so without resorting to borrowing.

In an article on TheKnot.com, contributor Rachel Torgerson advises against taking out a personal loan to finance your wedding, agreeing with financial planners on the dangers of taking on such large debt for one day of your life.

“The problem with personal loans is that most often people are taking them out because they’re trying to spend cash they don’t have. I would also lump in credit card spending here, because I think a lot of people pay for wedding-related things with a credit card and they may or may not have the cash to pay it off in full,” says CFP Laura Lyons Cole, personal finance contributor for financial planning website MainStreet.com.

If you’re considering taking out a large-sum loan, it means you probably don’t have the money to afford such a high-cost wedding in the first place. In general, money and financial stress are top issues that couples will argue over. In fact, studies have shown a high correlation between high-cost weddings and divorce rates.

Additionally, Josephon advises to consider how your ability to put money toward other savings, like a retirement savings account or your future children’s college savings, may be hampered when you start your marriage off with serious debt.

Paying Long Term for a Short-Term Event
With a consumer installment loan, you will be required to make payments for both principal and interest through the wedding loan term, Karimi explains. This means you will end up spending more for your wedding day than the actual cost of the event.

Karimi notes that a $32,000 loan at a 7.5 percent APR would take 48 months to pay off, with minimum payments at a bit under $775 per month-and that’s for buyers with excellent credit.

Even if you can afford such high monthly payments, think of the time it would realistically take to pay off this single-day event. Additionally, you would be carrying debt during a time of major change in your life; you may want to buy a home or a new car, or start a family, and such debt could prevent you from being able to open other lines of credit to pay for these expenses.

Don’t forget that creditors and lenders will look at your current financial standings, including other loans and lines of credit you have out. With a majority of young adults saddled with high student loan debt, their loan amount and interest rate offered will be affected by their total debt.

While you can get a loan with a lower credit score, you will ultimately pay more for it because of higher interest rates. Most financial advisors warn against taking such a loan, known as a bad credit personal loan.

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Personal Loans Versus Credit Cards

Advantages and drawbacks of each type of lending

Personal loans andCardsVsLoans_Featured credit cards, should they be used intelligently, can be great ways to finance your wants and needs. As personal finance author Greg McFarlane writes on Investopedia.com, credit in general grants us temporary access to other people’s money, and for a time, it is a win-win for all parties.

“The lenders get interest, the borrowers get leverage and the economy grows. What’s not to love?” he said. “Without credit, capitalism would stagnate.”

But which lending method is better: personal loans or credit cards? Let’s look at some of the high points and low points of each.

Personal loans
This type of credit is unsecured, meaning there is no collateral involved. Because this is a higher risk for the lender, as there is nothing of which they can take possession in the event of default, interest rates are fairly high. And because you will have a balance to be paid from day one, you are paying that interest starting the moment you sign on the dotted line. Still, these interest rates are typically lower than those of most consumer credit cards, giving personal loans an advantage there.

Another advantage of a loan is that it comes with a set term during which you will be repaying it, and a set amount to pay, which helps with budgeting. At the same time, credit card terms are either longer or unspecified, allowing for lower, although inconsistent, payment amounts.

“Many personal loans have a payback period of no longer than 60 months, or five years. Credit cards tend to amortize your payment over eight to 10 years, resulting in a lower payment over a longer time,” said debt adviser Steve Bucci of Bankrate.com.

Credit cards
While credit cards do come with inherently high rates — so high, in fact, that the president and Congress had to artificially cap those rates from outside the free market — for the first month after you purchase something on the card, you are technically getting a zero percent interest rate, McFarlane says.

“Should you choose to take 30 days or longer to pay for an item you bought on a credit card? Well, that’s when you’re failing to take advantage of the inherent benefit of the method of payment,” he explains.

Furthermore, credit card companies often offer a grace period for payments. That means you have more than a month to come up with enough money to pay off your balance and avoid being charged interest — that’s at least two pay periods to gather your own money and use it to pay off the money you borrowed.

Also, not having to wait for paperwork approval when you need or want the money, as you do with loans, is yet another way your credit card acts just like cash (except in plastic form).

Exceptions to these details exist when you are talking about business loans or credit cards, or about personal loans obtained for use of credit card consolidation. Regardless of how you are using your means of credit, make sure you are looking carefully at the terms of the agreement. Let us help you choose the method that best suits your needs, and then take full advantage of its benefits.

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What Is Peer-to-Peer Lending?

And why a financial institution is probably a better idea

Peer-to-peer lending, P2PLend_Featuredalso known as social lending or crowd lending, is a type of debt financing that allows people to borrow and lend money without a financial institution getting involved. It began in the mid-2000s, and we’ve seen peer-to-peer lending platforms such as the Lending Club and Prosper, which pair up borrowers with investors, grow and become greatly successful over the years.

Some people lean toward peer-to-peer lending simply because it removes an intermediary from the process, but what these people might not know is this type of borrowing takes more time and involves more effort and risk than other lending options.

“It’s very risky. It’s like investing in the stock market. Everybody may have great intentions, but when you’re lending this money, you have to be prepared to lose it,” says Beverly Harzog, co-author of “The Complete Idiot’s Guide to Peer-to-Peer Lending.”

First, it’s important to note why people participate in peer-to-peer lending. Peer-to-peer lending can yield great benefits for lenders, as the loans generate income in the form of interest, which is typically much higher than traditional interest percentages from things like savings accounts or CDs. In addition, peer-to-peer lending allows people to take out a loan when they may not have otherwise been able to get approval from standard financial intermediaries.

However, peer-to-peer loans are not insured, so default can be especially painful for investors.

“You might get back a bit more than a bank, but it is more risky because people might default on loans,” says Christine Farnish, chairman of the Peer-to-Peer Finance Association. “Even with responsible credit ratings, you can still get things that go wrong. So you can’t assume you’ll get your capital back.”

In addition, the lender is not able to have full confidence in the borrower. Where a financial institution can reject lending due to a high likelihood of the borrower being unable to pay the money when due, peer-to-peer lending involves much more of a risk factor. This is typically why the interest rate for peer-to-peer loans may be higher than traditional prime loans.

Here are just some of the benefits of borrowing through a financial institution versus peer-to-peer lending:

Financial institutions go hand in hand with reliability. You know it’s a dependable and consistent place to get a loan simply because they’re regulated by state and federal agencies, and likely have ties to your community.

Loan limits
A financial institution is backed by the Small Business Administration, so it can provide larger amounts — a $5 million maximum on a 7(a) loan — than peer-to-peer lending allows for. Most peer-to-peer loans, depending on their venue and investors, usually have a maximum of around $35,000.

Interest rates
In 2012, small-business loan borrowers at the Lending Club paid an average rate of 13.4 percent, according to a research study by the Federal Reserve Board of Governors. However, according to the National Federation of Independent Businesses, borrowers who took out small-business loans from financial institutions paid an average of 6.3 percent. So an institution may save you money in the loan process.

Depending on your credit history and circumstances, you may benefit from using a financial institution for borrowing over peer-to-peer lending. To learn more, contact us today.

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Loan Co-Signing

What to know before you agree to co-sign a loan

Loan co-signing is a highly charged Cosign_featuredtopic. On one hand, many people who co-sign loans are asked by close family members, so they may feel obligated and don’t think twice before putting pen to paper.

As with any financial decision, it is best to put aside the emotions and look at the facts. You aren’t being a bad family member if you say you need to think about it before agreeing, and you don’t have to say no just because you’ve heard the horror stories. The following information will help you think critically about co-signing so you can start determining what choice is best for you.

It is reasonable to take co-signing a loan very seriously because there are serious repercussions if the person who took out the loan can’t pay. Many people look at the task of loan co-signing as simply acting as a character witness. They have good credit and know that a financial institution trusts them with loans, and by co-signing, they are making it clear that they trust the person they co-sign for.

This is a dangerous way to think about the process, however, because you aren’t simply helping the financial institution make a decision about the borrower. Lenders don’t care about your opinion, they only care that there is someone who will definitely be able to pay. Be sure you understand that you aren’t just adding your credibility to the loan agreement, you are actually lending your assets.

When you co-sign, you are agreeing to pay for the loan, as well as any fees, penalties and other associated costs if the other party cannot. Depending on the specific loan and the state you live in, the lender may even take legal action against you if the loan is in default before attempting to collect from the other party. While this is a scary idea, it makes sense because the co-signer is the one most likely to be able to pay, and the financial institution doesn’t want to waste their time pursuing someone who has already demonstrated an inability to pay.

“By co-signing, you take on all the risk if the loan is not repaid but may only see a modest improvement to your credit score,” states Justin Harelik from Bankrate. “Even worse, the person who you helped most likely has bad credit. So he or she does not care whether another negative mark appears on his or her credit report. Needless to say, you have much more to lose.”

Even if you completely trust the person you agree to co-sign for, there are circumstances that can change your relationship in unexpected ways, so you must be fully prepared to pay when you co-sign. Divorce is an obvious example of good relationships gone wrong, but even co-signing for your children carries risks. There have been many tragic incidents of parents who are left to pay back student loans they co-signed prior to their child’s incapacitation or death. In some cases, financial institutions will negotiate or dismiss loans if a tragic death is involved, but you can’t count on that happening.

Now that you’ve fully considered the seriousness of the subject and the potential consequences, it is important to note that the big risks do indeed confer big rewards on the person you help, so you shouldn’t just say no automatically. Many people would be unable to further their education, get a car or a mortgage without a co-signer and many co-signers never end up paying a dime.

If you would be able to pay in an emergency (this is non-negotiable), and you want to help the other person, there are things you can do to make co-signing safer. First of all, if you are co-signing loans for a child, they can take out a life insurance policy with you as the beneficiary. So, if a tragedy does occur, you have a means of repayment that doesn’t drain your bank account.

You should also speak with the lender to determine the exact amount you might owe, so you can be prepared. You can also try to negotiate the terms so that you are only liable for the principal and not fees and penalties, for example.

“If you’re co-signing for a purchase, make sure you get copies of all important papers, like the loan contract, the Truth-in-Lending Disclosure Statement, and warranties,” recommends the Federal Trade Commission’s website. “Ask the creditor to agree, in writing, to notify you if the borrower misses a payment or the terms on the loan change. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.”

Last, make sure you realize that co-signing becomes part of your finances. This means it may impact your ability to take out a loan for yourself. So, if you plan to buy a vacation home or take out another large loan in the future, co-signing may not be feasible even if all the other pieces of the puzzle look good.

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Are Consolidation Loans Worthwhile?

The positives and negatives of consolidation loans
Although there178725372 are an endless variety of reasons why people find themselves in over their heads with debt, the cost of education is frequently to blame. Fortunately, there are many available options for managing multiple sources of debt. One option is consolidating student debt into one loan.

Trying to figure out how to pay down debt is a stressful situation, and it can be even more stressful if you’re dealing with multiple loans. Many people feel that their financial situation would be more manageable if they only had to think about one loan and had one clear monthly payment to save for. This is possible through debt consolidation loans.

Many financial experts advise against seeking loan forbearance — the ability to reduce or even stop payments completely for up to a year — and instead advise that people begin paying down student debt as soon as possible. If you cannot make your current loan payments and do not want to seek forbearance, consolidating may be the best solution.

“Let’s say you have $80k in student loan debt right now and can’t make the monthly payment. What I’m going to do is consolidate my loan and I’m going to put them in a federal direct loan consolidation,” recommends Rick Ross from the financial advisory College Financing Group on Forbes.com.

“Consolidation can save you money,” notes Maggie McGrath, Forbes staff writer. “However, you cannot consolidate private loans with federal loans, and when you do consolidate federal loans, you may lose benefits associated with the original loan, like interest rate discounts, principal rebates or some loan cancellation benefits.”

If you’re consolidating federal loans into a federal Direct Consolidation Loan, your monthly payment could be greatly reduced because the consolidation loan can allow you up to 30 years for repayment.

“You might also have access to alternative repayment plans you would not have had before, and you’ll be able to switch your variable interest rate loans to a fixed interest rate,” states the Department of Education’s Office of Federal Student Aid. “However, if you increase the length of your repayment period, you’ll also make more payments and pay more in interest.”

It’s important to note that consolidation cannot be undone. The original loans are, in essence, paid off by the new loan. Therefore, they no longer exist and cannot be retrieved if you decide you prefer the benefits of the original loans more. This is why it’s important to carefully consider the consolidation process.

If you’re currently in default, you must meet certain criteria before consolidating. Information about that criteria and a list of the types of federal loans can be consolidated into a federal Direct Consolidation Loan can be found at http://studentaid.ed.gov/repay-loans/consolidation.

When applying to consolidate your loans, it’s important to be careful of imposters who attempt to steal personal information or scam people into paying fake fees. There is no fee charged when you apply to consolidate your federal loans.

“If you are contacted by someone offering to consolidate your loans for a fee, you are not dealing with one of the U.S. Department of Education’s (ED’s) consolidation servicers,” cautions the ED’s Office of Federal Student Aid.

If you have private loans, you will not be able to use this federal resource for consolidation. There are other methods of consolidating debt, however, such as through a home equity line of credit or a second mortgage. The obvious risk to this type of consolidation is that using your home as collateral could mean that you lose your home if you cannot make payments or even if your payments are late.

“What’s more, consolidation loans have costs,” according to the Federal Trade Commission (FTC). “In addition to interest, you may have to pay ‘points,’ with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.”

If you would like to discuss your best options for paying down debt, please don’t hesitate to give us a call.

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Four Loans to Avoid

Sidestep these loans for less financial troubles

When you’re in a financial bind, it may seem like taking out a loan is an easy out. However, that’s not always the case. Sometimes, you risk losing a lot more than you’ve gained.

Unless absolutely needed, most of the time, certain loans aren’t worth it. Which ones, you ask? Steer clear of these particular loans:

1. Payday loan
The good part about a payday loan is that you get an advance on your next paycheck. But the bad news is, you’re also paying the lender fees and interest.

“A payday loan can be approved within a matter of hours and there is typically no credit check,” explains Theodore W. Connolly, author of The Road Out of Debt. “Usually, you write a personal check payable to the payday lender for the amount you wish to borrow plus a fee. The check is dated for your next payday or another agreeable date within the next couple of weeks when you figure you’ll be able to repay the loan.”

It may be easy money, but in the long run, you’re probably going to pay much more than you were lent. “You will most likely end up paying three, four or even 10 times the amount you originally borrowed. Debt created by payday loans will often quadruple in just one year,” says Connolly. “One tiny mistake can mean lifelong debt.”

2. Pawnshop loan
This type of short-term loan is when you offer a valuable personal item — jewelry, electronics, musical equipment, etc. — to a pawnshop. In return, the shop gives you a loan that’s a percentage of what the item is worth. Already, you’re subject to a possible service charge, but there are many other fees involved, too.

“Pawnshop loans are nearly all state-regulated, and ‘finance charges’ can vary from five percent per month to 25 percent per month. In Indiana, the ‘interest rate’ is capped at 36 percent APR or three percent per month, but pawnshops can charge an additional 20 percent per month service charge, making the total allowable finance charge 23 percent per month,” says Steve Krupnik of South Bend, Ind., and author of the book Pawnonomics. If you’re unable to repay the loan and interest when the loan period ends, the pawnshop keeps the item for profit.

3. Car title loans
A car title loan is where someone uses their car as collateral to borrow money. The bad news: it charges 300 percent interest, plus you run the risk of losing your car.

“We consider these loans to be a triple threat for borrowers,” says Ginna Green, spokeswoman for the Center for Responsible Lending in Durham, NC. Whereas most car loan lenders take into consideration the borrower’s financial situation (their income, mortgage, credit and other bills) to make sure the payments are affordable. “Car title lenders don’t do that,” Green says. “They get a lot of folks trapped in debt, and to the point where they’ve got their family vehicle on the hook.”

4. Tax refund loan
Offered by some tax preparation services, these loans are what are given to you in anticipation of what you’ll get back for your actual tax refund. You’d then pay them back once you get your refund. So if you were looking to use your tax refund on something that you’d like to have or need right away, this may sound like a good option, but realistically, like other loans, there are fixed fees and interest costs attached to them. Tax refunds loans are typically pretty small, meaning that with the high costs associated with the loan, you’ll end up paying much more than you’d like.

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