4 Loans to Avoid and 5 Loans to Consider, According to Financial Advisors

Financial Advisors

Payday loans are one of the worst options if you need money.
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If you need money quickly, there are many loan options. A few months ago, my husband and I had to take out a small personal loan to cover some expenses while we waited to sell our house.

Thanks to our credit, we were quickly approved and received fairly favorable terms. We paid off the loan as soon as our house was sold. It’s important to realize that not all loan options are created equal.

“When you need to borrow money, you should avoid loans with high interest rates, very short repayment terms, or clauses that put your critical assets at risk,” said financial expert and head of Tayne Law Group. Lawyer Leslie Tayne said. .

Some loans involve more money and inconvenience than they are worth. I spoke with some of her financial advisors and asked for their opinions on the top four loan types to avoid and some alternatives to consider.

See our insider picks for the best personal loans »

1. Payday loan

Payday loans are the worst type of loan as they offer very high interest rates and short repayment terms. Loan limits are also fairly small, around $500 or less.

Payday loans are generally due by your next payday and can have interest rates as high as 400%, excluding additional fees.

Lucas Noble, Certified Financial Planner at Noble Financial Group, said:

Most people take a payday loan to cover immediate expenses, Noble said, but when it comes time to pay off the loan, they need to have much more money than they borrowed.

The overall structure of payday loans makes it difficult for people to get back on their feet financially and avoid needing another loan to pay off the last one.

2. Title loan

A title loan is another high-interest loan to avoid because of the high fees and the need to use your own car as collateral.

“Like payday loans, these loans are short-term and have very high annual interest rates, but because they are secured loans, you risk losing your car if you can’t pay it back,” says Kendall Meade, CFP at SoFi. says Mr. .

Some lenders offer title loans, with fees as high as 25%. For example, if you borrowed $1,000, you would have borrowed a total of $1,250 at the end of the 30-day period.

According to the Consumer Financial Protection Bureau, 83% of people who took out a title loan in 2019 were still in debt at least six months later. So while these loans are meant to be very short-term, the fees could create another cycle of debt and keep draining more money from the borrower.

See our insider picks for the best debt consolidation »

3. Caching

Some credit cards offer cash advances that allow you to borrow more than your credit limit and withdraw cash from an ATM. This option is convenient and does not require you to apply for a new loan, but it is also more costly as you will be charged more interest than the current rate of credit card transactions.

“Cash advance interest rates can be as high as 36%, excluding upfront fees,” says Meade. “You will be paying high interest rates from day one until you pay off the balance.”

4. Family loan

If you have friends or family who can lend you money for unexpected expenses, this might seem like a good option. If you are actually receiving a loan rather than a gift, establish clear loan terms.

For loans over $10,000, the IRS requires a written contract detailing the loan terms, repayment schedule, interest charged, etc. A person lending money must also report income earned from tax interest payments if the total amount is greater than $10,000.

Unfortunately, these types of loans can also damage relationships with loved ones if something happens that delays repayment of the loan. Conflicts can arise between family members over financial matters.

See our insider picks for the best personal loans for bad credit »

better loan options

While some loans don’t seem worth the hassle, there are still plenty of loan options that can help you in an emergency, especially if you have a good or average credit score.

  • A credit card with 0% annual interest. If you have good credit, you may be able to temporarily get a 0% annualized credit card. This will help you avoid high interest rates and fees for a while. You must ensure that you can pay off your balance before the 0% APR period ends.
  • home equity loan. If you have equity in your home, you can borrow part of that amount with a home equity loan. These loans are usually fixed interest rates and fixed payments, but your home is also used as collateral.
  • Hello. A home equity line of credit is another type of home equity loan that can be borrowed from a revolving line of credit similar to a credit card. These loans are useful for home repairs and renovations that require borrowing money as needed.
  • 401(k) loans. A 401(k) loan allows you to borrow money from your 401(k) retirement balance and pay it back through payroll deductions. This option usually has a lower interest rate and is limited to 50% of the vested account balance or $50,000, whichever is less.

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