Contrary to popular belief, debt is not always a bad thing. In fact, having a healthy portfolio of debt can reward you will an excellent credit score. However, there are some types of debt that are the absolute worst kinds that will make it more difficult for you to ever get out of debt. Let’s take a look at what these are below.
Payday Loans
This one is number one on our list because you should be avoiding this loan at all costs. These are short-term cash loans where the borrower’s personal check is held for future deposit. At the end of the loan, you have three options. These include let the payday loan company cash your check, pay the loan in cash to void your check, or pay the interest charges owed for that period and allow the loan to roll over for another term.
The last option is where many consumers find themselves at the time the loan is due. It may not seem like too much money to have the loan roll over, but you need to actually look at the interest rates. Borrowing $100 for a fee of $15 to $30 is actually equivalent to a 390 to 780 annual percentage rate. Don’t get one of these loans as you will find it harder and harder to get out of them. You should resort to traditional funding or safer car title loans.
Tax Preparer Loan
You may have noticed or even taken advantage of the fact that the tax preparing companies, like H&R Block, used to offer your refund money upfront for a fee that was payable at the time the refund was received. This allowed you, as a taxpayer, to have access to the funds that were anticipated from your IRS refund at the time you prepared your taxes.
Tax preparer companies are no longer permitted to offer this option, however, they have switched to offering personal lines of credit. This has the same concept behind it has the original loan. What you need to realize is these lines of credit have an abundance of fees and double-digit interest rates. While it may seem like a great option at the time to get your refund money back early, realize that when you take advantage of these offers you are handing over a large portion of your refund to the tax preparer.
Credit Card Cash Advances
As a general rule of thumb, any offer for a cash advance should be highly avoided. Many credit card companies don’t just stop at charging significantly high-interest rates, rather, they now offer cash advances on the credit they extend to you. This type of advance is really easy to get as you don’t have to fill out any paperwork, you can get the money at any local ATM, and you don’t have to actually talk to anyone to get the money.
Credit card cash advances typically cost a flat service fee plus an interest fee for the time of money you have the cash out for. The flat fee typically ranges from $10 to $20 per transaction. The interest rate will typically be up to 7 percent higher than your traditional interest rate for the credit card.
Pawnshop Loan
Unless you want to say goodbye to your stuff, don’t ever attempt getting one of these loans. The concept is that you take your valuable items into the pawnshop. The pawnshop appraiser gives you a loan for a specific amount of money and your valuable items are held as collateral. If you don’t pay back the loan in the agreed upon period, you will surrender your valuable items over to the pawnshop.
This type of loan typically comes with high-interest rates and fees. There will often be a service fee for establishing the loan and a storage fee for the items.
When you are in a financial bind, it may seem like any option that will result in you getting the money you need will have to do. We highly encourage you to avoid any of the loans listed above as they will only cost you money in the long-term, typically leaving you off worse than you were to start with.