Loans to Avoid When Looking for Financial Help

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 improve your money problems. Here’s what to avoid:

• 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.

• 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. 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. Contact a consumer law attorney or your state attorney general’s office to find out if your state has payday loan laws and what your rights are.

• Pawnshop loan: 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.

• Tax refund loan: Some tax preparers, finance companies, car lenders, retailers, and check cashing companies make this kind of loan for no more than $5,000, and for no more than ten days. In addition to having to pay very high interest on the loan, you must also pay the lender an upfront fee, and file your tax return electronically to the tune of about $40. The fees involved and the effective rate of interest you pay may be in the triple digits. When the IRS issues your tax refund, it deposits the money directly into the lender’s account. They take their money and give you what’s left.

• Car title loan: If you own your car, some lenders will make you a short-term loan for a small fraction of what your car is worth. Usually the loan will have a very high rate of interest. To get the loan, you must give the lender the title to your vehicle and a set of car keys. If you miss even one loan payment, you may lose your car.