Unexpected expenses can happen to anyone at any time, and they frequently do. Whether your car dies at the worst possible moment or a major appliance breaks down beyond repair, there are times when you need money fast.
Ideally you’ll simply withdraw funds from your emergency savings account. But if you don’t have one, or it’s depleted, you’ll need to find an alternate source. Sometimes these alternate sources are loans, and sometimes they aren’t such a good idea.
Before you take out a questionable loan, read on to discover 5 types of loans you don’t need so you can avoid making a financial mistake that can haunt you for years to come.
If you own a car you can get an auto title loan. The way it works is simple. You give the lender the title to your vehicle and they give you a loan. When you pay back the loan, they’ll give you back the title.
Is there a catch? Well, there are large fees and high interest rates. If you need a low monthly payment, the lender can have you pay interest only, which means you’re not actually reducing the principal of your loan. Thus you’ll be paying it forever and if you stop, they own your car.
In order to qualify for a payday loan, you’ll need to be employed. This is because the lender will offer you a loan based on the amount of your next paycheck. Typically these loans are under $500 and typically they have a huge interest rate.
Payday loans work by the borrower writing a post-dated check for the amount they want to borrow. The lender also charges a fee on top of the borrowed amount of course. The lender then holds the check until your “pay day” when they cash the check or you bring them the money to pay off the loan.
Pawn Shop Loans
For people with valuable jewelry, books, musical instruments or other items, pawn shop loans can be an easy way to get money. The deal works by you leaving your valuable item at the pawn shop and the owner gives you a loan. Typically, the loan is for about a third of what the item is wroth.
You then have a set amount of time to repay the loan and if you don’t, the pawn shop keeps the item you left and resells it. The upside is that there is no credit check with this type of loan, but the obvious downside is that you risk losing your valuables if you’re late on your payments.
Sub-Prime Mortgage Loans
For people who wanted to buy a home but didn’t have the money to do so, mortgage brokers were anxious to hand out sub-prime mortgages.
These types of loans were given to borrowers with low income and bad credit scores. Inevitably, borrowers didn’t repay their loans, which in part, led to the housing crisis.
Reverse Mortgage Loans
If you own your own home and have some equity in it, you’ve probably been marketed reverse mortgage loans. The loan works by a lender allowing you to take out the equity in your home in cash to pay bills or retire.
Senior citizens are often times targeted because often times, they are the ones with their homes paid off and have low income.
The loan must be paid back to regain equity and if the borrower dies or sells the home, the entire loan must be repaid, including interest.