Think credit cards with their high interest rates are the worst deal out there? Wrong! Unfortunately, there are other loan products that dwarf even the worst credit card offers with incomprehensibly-high interest and dreadful fees.
Choosing these loans while ignoring their unaffordable terms has left many borrowers with perpetual debt, at risk of losing their home, or in court to declare bankruptcy.
Of course these downsides often aren’t spelled out in plain English. The true cost is often buried in the fine print and takes some probing to find the real information.
Here are four categories of loans you should be extra careful about taking and may potentially want to avoid altogether.
Credit Card Cash Advances
Taking a cash advance on your credit card essentially amounts to taking out a loan against your credit limit. It’s often used if you need cash quickly as you can use your card to get money directly from an ATM.
Why are cash advances often a bad deal when compared to using a credit card normally? Because:
- Interest rates are even higher. Taking cash advances against your credit account means you can expect to pay about 1 to 7 percent higher interest rate than purchase APRs.
- Interest is charged immediately. On regular purchases, you’ll have a grace period to pay off the balance to avoid interest. This typically isn’t the case with cash advances, which start accruing interest charges immediately.
- There are added fees. In addition to interest, you’ll likely be hit with a fee when you request the cash advance. This is typically a percentage of the amount advanced.
Make sure you have all the facts on the particular policies for cash advances on your card. That way, you’ll have a better idea of deciding if it’s worth the cost.
Short-Term, High-Interest Loans: Payday, Car Title, and Pawn
These three types of loans are in the same category for one reason: They all have super-high interest rates. What’s high? Think APRs of 100% and up. Plus, fees are often tacked on to make these options even more expensive.
Payday loans are often given as cash in exchange for a paying back the loan on a predetermined date (usually payday) with fees and interest. They’re often used as short-term loans to grab some cash between paychecks in exchange for a good chunk of interest.
Title loans have more variable terms, but typically come with sky-high interest rates as well that oftentimes exceed 250% APR. Since a car is used as collateral for the loan, the vehicle may be seized if the loan is not paid back on schedule.
Pawn loans are often seen as short-term loans, too. But with rates of 20-30% over a few weeks, that translates to an annual percentage rate over 300%.
For any of these loans, make sure to measure the long-term cost of taking them. While single, short-term use might not be so harmful, repeatedly relying on these types of loans will cause fees and interest to add up quickly.
Reverse mortgages can be a helpful tool if used properly. However, they can turn bad when the structure of the loan adds on extra fees and costs.
Some experts have pointed out that these loans are more costly than alternatives that may serve the same purpose. Reverse mortgages often come with various fees that can increase the cost of the loan. Since monthly payments aren’t made for reverse mortgages, the balance can continue to balloon over the life of the loan as interest charges add up.
Although there are very tight regulations around reverse mortgages, companies that issue them have been accused of preying on the elderly with questionable sales tactics.
Make sure to consider all the options for reverse mortgages before ending up with a more expensive option than what’s needed.
Certain Types of Home Mortgages
Although many of the awful mortgage products that resulted in the home mortgage meltdown in the last few years have disappeared from the market, there are still bad deals out there.
In particular, you need to be careful with any mortgage that isn’t a standard, fixed-rate option. With interest rates currently very low, it may make little sense to sign on for anything but the traditional 15- or 30-year fixed-rate mortgage. These other options may just be a bad deal for you that can land you in trouble later.
Examples of mortgages you should be careful of include:
- Adjustable-rate mortgages (ARMs). Adjustable rate mortgages may start out as a good deal, but rates can increase with time, meaning payments go up, too. If you’re unable to refinance, you might be stuck paying a lot more or risk losing your house if you can’t afford payments.
- 40-year fixed loans. While you’ll enjoy the benefits of a fixed rate with low monthly payments, you’ll pay much more in interest over the life of the loan. Plus, it will take longer to build equity in your home as well. These loans are often used when trying to finance a more expensive home purchase, so this may be a sign that you’re overreaching with your purchase.
- Interest-only and balloon loans. While you’ll enjoy low payments upfront, eventually payments will increase or the balance of the loan will come due. Perhaps you’d been promised that you’d be able to refinance, but many others have been stuck in this trap when they’re no longer eligible to modify their loan.
- Home equity lines of credit (HELOC). HELOC abuse was a major issue with the recent mortgage crisis. While borrowing against the equity home might sound great coming out of a salesperson’s mouth, it’s dangerous if you’re suddenly unable to come up with payments. Using a HELOC to consolidate debt often means turning unsecured debt into secured debt with your house as collateral. Use caution if you’re being sold on all the supposed benefits of HELOCs.
Unless yours is a legitimately exceptional case and you completely understand the implications of the mortgage you’re receiving, these options are often not the best choices. Make sure to really understand the terms of your loan so you and all your life savings aren’t caught up in a mess later.