Borrower beware: Dangerous loans
These days, there are different types of loans available for a large variety of purposes. Many are safe and reliable; however, there are some loans that involve more risk for the borrower. If you’ve been inquiring about a loan that seems too good to be true – it probably is. Read on to learn more about some of these risky loans and how they can get you into trouble fast.
Unsecured payday loans
A payday loan, also known as a cash advance loan, check advance loan, post-dated check loan or deferred deposit check loan, is typically a short-term, high interest rate loan. The reasoning behind its name is that it is often repaid after you receive your next paycheck. The appeal of a payday loan is that it can be approved within a matter of hours and there is typically no credit check. This type of loan supplies people with money fast, however, it comes at a high cost.
In the case of payday loans, you write a personal check for the amount you would like borrow, plus a lender fee based on this amount. This type of loan is typically for up to 14 days or your next payday. The lender will pay you the amount you would like to borrow and hold on to your check until the arranged payment date. When this day comes, the lender will either deposit your check or, if requested, will continue to hold the check and extend the loan for an additional fee. If you continue this cycle for an extended period, you can rack up significant fees. Even if you pay off the loan on the arranged pay date, you could still be paying an annual percentage rate of 300 or even 400 percent – far more than a credit card.
Solution: To avoid using this sort of loan, try to set up an emergency fund. This way, if an unexpected expense or bill comes up, you’ll have the money to pay for it, without paying a sizable interest fee. If you don’t have an emergency fund and need money, shop around for the credit offer with the lowest APR (annual percentage rate) or consider other sources. You may be able to arrange a pay advance from your employer or a loan from family or friends.
Car title loans
Similar to payday loans, car title loans are typically used in emergency situations. They are secured by your car’s title and the amount you can borrow is based on your car’s value. This type of loan is usually for a 30-day period and the allowable interest rate varies depending on state. But many car title loans come with a 25% finance charge for 30 days or a triple-digit annual interest rate of 300 percent, according to the Consumer Federation of America. High interest is only one detriment of a title loan; if you can’t keep up with interest charges and fees the lender can repossess your vehicle.
Solution: A car is a valuable asset for many families in terms of livelihood and even just getting to work. Your car is therefore usually not a smart way to securitize a loan. As with payday loans, always try to have a rainy day fund available, should you need extra cash.
Tax return refund loans
Tax refund loans, also called instant refund loans or refund anticipation loans, provide borrowers with their tax refund prior to actually receiving any money from the government. The typical time period for this type of loan is less than 10 days, with the loan being repaid when your actual refund check from the IRS is received. Fees for an average tax refund loan have high interest rates, ranging from 40 percent to over 700 percent APR. That’s a lot of money to pay for a loan that doesn’t get you cash significantly faster than simply waiting for your refund.
Solution: There are a number ways that you can get your income tax returns sooner and without paying a fee. The easiest method is to reduce your income tax withholding on your W-4 form with your employer and claim more withholding allowances. Even if you prefer to receive a refund at the end of the year, you can still speed up this process. Submit your tax return early, as soon as you get your W-2. Also, by filing electronically, you can have your refund deposited directly into your bank account within ten to 14 days of filing.