Loans to Steer Clear Of—At All Costs

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This post originally appeared on Dummies.com.

If you don’t have enough money to pay all your living expenses and debts, do not take out a loan that will compound your financial problems. Although personal loans may give you temporary financial relief, more debt won’t fix your money problems. When it comes to improving your finances, you won’t find any easy answers or shortcuts to common sense and dedicated budgeting. You’ve just got to bear down and do it.

Here are some loans to steer clear of — at all costs!

  • Advance fee loan: To get this kind of loan you must pay sometimes as much as several hundred dollars to the lender. Some advance fee lenders take your money and run, but others give you a very high interest loan. Traditional lenders do not make advance fee loans.
  • Finance company loan: Some finance company are less than honest about all the fees associated with the loan or may mislead you into thinking that you’re getting an unsecured loan when in fact the loan is secured by household goods, such as your furniture, entertainment center, and so on. (This detail is usually buried in the fine print of the loan agreement.) If you default on the loan, you risk losing the asset(s).Some finance companies encourage consumers to get a bigger loan than they can afford so they’ll end up in default.
  • Payday loan: To get this loan, you write a personal check to the lender for the amount of money you want to borrow plus a percentage of the loan amount or a set amount for every $50 or $100 you borrow. The lender pays you the amount of the check less its fee but does not cash your check.On your next payday when you repay the loan, you get your check back. If you can’t repay the loan in full, the lender rolls over the loan until the following payday in exchange for another fee, which is higher than the first fee. If you keep rolling over the loan, the cost of the loan skyrockets and you have a harder and harder time paying it off.Some states have payday loan laws. Contact a consumer law attorney or your state attorney general’s office to find out if your state has such a law and what your rights are.
  • Pawnshop loan: This is a short-term loan (no more than three months in most states) with a very high interest rate. Here’s how this kind of loan works: You give the pawnshop an item that you own, like a TV, DVD player, piece of jewelry, or computer. The pawnshop lends you a percentage of the item’s value. At the end of the loan period, if you cannot afford to pay the loan plus interest, the pawnshop keeps your item and sells it.

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