I'm going to tell you something that flies in the face of what your Grandma told you: Debt isn't all bad.
I have mortgage debt. The interest rate is low, and the interest I pay is tax deductible.
That isn't to say all kinds of debt are good. But my mortgage allowed me to buy an asset (my house) when I otherwise wouldn't have been able to. And having a home for my family gives me security and emotional wellbeing that you simply can't put a price on.
But not all loans are as noble as a mortgage, student loan, business loan, or even a low-interest personal loan. Some loans are all take, with high interest rates and devastating emotional consequences.
Here are five of the worst loans you can get:
1. Payday Loans
Payday loans are also notoriously easy to renew. Often, all you have to do is pay a seemingly small fee to extend the loan. Before you know it, you are stuck in the payday loan cycle, and the outrageous interest charged makes it hard to break free.
2. Car Title Loans
A car title loan usually has a lower interest rate than a payday loan. However, the APR is still going to be relatively high. On top of that, you secure a car title loan with your car. This means that if you run into more trouble and can't make payments, the lender can repossess your car.
Howyou get to work and earn a living if you don't have transportation?
3. Pawnshop Loans
Pawnshop loans are another type of secured loan that can come with a hefty interest rate.
You agree to repay the loan within a certain amount of time, leaving a valuable item as collateral. If you don't return to pay off your debt, the pawnshop owner can sell your item, whether it's gold heirloom jewelry, your favorite gun or some other item of value. If there is sentimental value as well, this type of loan can be devastating.
Have you seen the ads for "early" tax refunds?
When you are offered an "early" tax refund, you are actually being offered a loan. A tax preparer figures your , and then offers you a loan based on your expected amount. You get money up front (usually only a portion of what your refund should be) and agree to let the tax preparer take the money from your refund.
The fees can be quite high for this type of loan. Plus, between e-file and direct deposit, it's possible to receive your refund in seven to 10 business days, so there's no reason for these types of loans in most cases.
5. Certain Secured Credit Cards
Make no mistake: A secured credit card is a type of loan. However, instead of granting you a line of credit without requiring you to put up collateral, a secured card usually requires that you put money in a specific account to act as security against a default.
The money in this account isn't used to make payments on your card, though. Some prepaid cards have high origination and setup fees, so a card with a $500 credit limit might start out with $300 already on the card from the fees, leaving you only $200 in available credit. Interest rates are usually quite high with secured credit cards, and you often have to deal with annual fees as well.
All of the worst loans come with high fees and interest. On top of that, they are often viewed negatively in credit scoring models. A payday loan can ding your credit in a way that a car loan doesn't.
If you're in a short-term crunch and have decent credit, you may consider a low-interest personal loan instead. Personal loans often offer lower interest rates than credit cards and therefore can save you hundreds of dollars in interest charges. See how to borrow cheaply without the risk of losing your car or home in 4 Situations When a Personal Loan is a Good Idea.
More Great Reading:
- 7 Steps to a Perfect Credit Score
- 8 Steps to Survive a Personal Financial Crisis
- How to Build Excellent Credit on $30k a Year or Less
- Create a retirement savings goal
- Design an investment plan to reach it.
- Get a professional money manager to continually monitor and rebalance your portfolio
Sound complicated? Don't stress. Vanguard's new robo advisor service can help you put all of this (and more!) on autopilot, all for an annual gross advisory fee of just 0.20%.