Loans to Avoid, Part One
Thursday, September 11th, 2008Pawnbrokers
When you pawn something, you turn it over to a pawnbroker in exchange for a short-term loan on a small percentage of the value. If you can’t pay back the loan in time, the pawnbroker tries to sell it. If the pawnbroker sells your item for more than the loan amount, you are supposed to get the difference. The interest rates pawnshops charge are usually very high, and the terms are not very good. It’s best to stay away from these types of loans altogether.
Debt Consolidation Firms and Finance Companies
“Need money? Loans: quick approval, no credit check.” “Too many bills? Cut your monthly payments in half!” Ads like these are tempting if you’re in a credit crunch. After all, you may reason, if I could just reduce my monthly payments, I could get ahead. Finance companies can be a dangerous source of loans for two reasons:
• They often put their clients deeper into debt.
• They can stigmatize the borrower as a poor credit risk.
There are two types of debt consolidation firms: finance companies and bill-paying services (although these names are sometimes used interchangeably). A finance company extends you a loan so you can pay off your individual bills and owe just one creditorthe finance company. A bill-paying service also pays your monthly bills, but doesn’t pay off your original bills. Let’s look at each:
Finance Companies will often lend money to customers who can’t get debt consolidation loans from a bank or credit union because they are too far in debt. Finance companies can afford to take risks on these customers because they charge outrageously high interest ratesas high as 25 percent or more. In addition, they may charge application fees or other additional fees. They also offer very low monthly payments, which means a customer who makes the minimum payment each month will end up paying a bundle in finance charges over a long, long period of time.
