Loans To Avoid
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Loans to Avoid
Pawnbrokers
When you pawn something, you turn it over to a pawnbroker in exchange for a short-term loan on a small percentage of the value. If you can’t pay back the loan in time, the pawnbroker tries to sell it. If the pawnbroker sells your item for more than the loan amount, you are supposed to get the difference. The interest rates pawnshops charge are usually very high, and the terms are not very good. It’s best to stay away from these types of loans altogether.
Debt Consolidation Firms and Finance Companies
“Need money? Loans: quick approval, no credit check.” “Too many bills? Cut your monthly payments in half!” Ads like these are tempting if you’re in a credit crunch. After all, you may reason, if I could just reduce my monthly payments, I could get ahead. Finance companies can be a dangerous source of loans for two reasons:
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They often put their clients deeper into debt.
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They can stigmatize the borrower as a poor credit risk.
There are two types of debt consolidation firms: finance companies and bill-paying services (although these names are sometimes used interchangeably). A finance company extends you a loan so you can pay off your individual bills and owe just one creditor—the finance company. A bill-paying service also pays your monthly bills, but doesn’t pay off your original bills. Let’s look at each:
Finance Companies will often lend money to customers who can’t get debt consolidation loans from a bank or credit union because they are too far in debt. Finance companies can afford to take risks on these customers because they charge outrageously high interest rates—as high as 25 percent or more. In addition, they may charge application fees or other additional fees. They also offer very low monthly payments, which means a customer who makes the minimum payment each month will end up paying a bundle in finance charges over a long, long period of time.
This is precisely why finance companies are so dangerous. Because the payments are so low, customers believe they are getting ahead, and may be tempted to take on additional credit obligations through credit cards or other loans. The debt spiral just continues. In addition, the total amount you owe grows, often significantly, because of the loan’s high interest rate. Debt consolidation loans are illegal in most states.
More importantly, finance companies can be considered negative references on credit reports. Because many people who borrow through finance companies are not able to qualify elsewhere, credit card issuers and bankers look upon someone with a finance company loan as a poor credit risk—even if all the payments were made on time.
Some finance companies advertise as if they are offering debt consolidation loans, but they are actually offering home equity loans. If you’re going to take on a home equity loan, it’s best to do so through a reputable financial institution, like a bank or credit union.
Bill-Paying Services can be even more dangerous than finance companies. Their advertisements make them sound like debt consolidation firms, but they’re not. Bill-paying services, however, are just what their name says they are. They pay your bills each month, but they don’t refinance them and they don’t pay your loans off for you.
With a bill-paying service, the customer writes one monthly check to the firm, and the firm writes checks to each creditor. In addition, the customer must pay an annual and/or monthly fee to the bill-paying service. This fee could easily amount to 10 percent of your monthly bills.
It’s easy to see how bill-paying services often simply add to a borrower’s total debt. Worse yet, many of these firms are not regulated, and some have failed to make customers’ payments on time, or have folded, leaving customers none the wiser—until collection agencies start calling.
In some states, for-profit bill-paying services are highly regulated or even illegal. Your state attorney general’s office can give you more information about laws in your state.
Stick with It
Your debt problem will not last forever, but it also will not be resolved overnight. On average, it takes someone with a serious debt problem two to six years to pay off their loans. Don’t give up! While you are working your way out of debt, try to keep a sound perspective and a sense of humor. The discipline and money-management principles you are learning now will benefit you for the rest of your life.
This post was tagged with: credit card debt, credit card debt consolidation loans, debt consolidation loan, debt goals, debt plan, Debt Reduction, loans to avoid
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