4 Loan Types to Tread Lightly With

Sometimes, debt can’t be avoided. We need money and we don’t have any available, so we turn to loans and credit cards. It’s the natural way of our society, and sometimes, taking on credit can be helpful. Unfortunately, there are a few loan types that someone should always try to avoid. These forms of debt often come with extremely high interest rates and make it difficult for you to pay them back. This makes the debt expensive and long-lasting.

When it comes to the following 4 loan types, proceed with caution. Tread lightly with these forms of debt and have a plan in place to pay them off as soon as you can. In fact, before you take out these types of loans, make sure you’ll be able to pay them back. Otherwise, avoid them at all costs.

4 Loan Types to Tread Lightly with

#1 Payday Loans

If you take anything away from this article, I want it to be this: avoid payday loans at all costs! Payday loans are designed to keep you coming back for more. The interest on these loans is unreal. I’m talking 100%, 150% and higher. That means when you do pay the loan back, you’re basically paying double (or more) the loan amount.

Payday loans should always be a very last resort. Because of the high interest rate, you need to keep taking them out to pay the previous one off. I know how hard it is. I’ve had my own stint with payday loans and it was awful. I know it can feel like there’s no other option, but please do exhaust every other resource before going this route. Check out the article Payday Loans: Friend or Foe? for more details.

#2 Personal Loans

While personal loans certainly aren’t as bad as payday loans, they can also be dangerous. Most times, personal loans are unsecured, meaning they aren’t tied to an asset. Because the loan isn’t tied to an asset (like a car loan or a mortgage), they often come with much higher interest rates. They essentially function like credit cards but sometimes come with higher limits.

The higher limits are what makes personal loans dangerous. Outrageous balances combined with high interest rates mean you’re spending way more than you should. If you’re in a position where you need a personal loan, be sure to read the article 5 Things to Consider Before Taking a Personal Loan first. Know your options so you can make the best financial decision.

#3 Consolidation Loans
Consolidation loans can be extremely helpful or extremely hurtful. With a consolidation loan, you’re taking balances from multiple other debts and combining them into one loan. This can be beneficial if you are managing a lot of payments and want to have one set amount go out every month.

The trick to leveraging consolidation loans to your advantage is by making sure your budget is in order. So many times I see clients (or people in general) taking out consolidation loans, transferring the balances from other debts and then racking up those balances again. Essentially, leaving them with double the debt.

Know your numbers. Make sure you can afford the consolidation payment. Make sure you have a savings in case something comes up. Ending with more debt than you started will not feel good. 

#4 HELOCs (Home Equity Lines of Credit)

The final loan type to tread lightly with is a HELOC or home equity line of credit. Usually, a HELOC allows you to take out a loan against the value of your house. Most people do this to upgrade their property. The downside? If the economy crashes and your property value drops, you could be left in the negative.

Obviously the worst-case scenario would be you can’t afford the mortgage and the HELOC payments, leading you down the road of foreclosure. If you do plan to take out a HELOC, make sure you only take what you need. You will now have an extra payment to make every month on top of your mortgage. This is one debt you don’t want to play around with.

Related: 5 Ways to Approach a Bank Loan

Whether you start with one item on this list or tackle all five, each of the items on this list will help you take your finances to a new level. The items on this list will produce the long-term results and success you’re worthy of. You can do it! Just stay the course, stay consistent, and stay motivated. Have you done or started doing any of these things? Drop a comment below to share!

-Raya
The CGS Team

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