We've already talked about subprime borrowing on auto loans and how it hurts you in the long run. However, there comes a time when we realize our paychecks are not meeting our demands and we have to have money now. Loans usually seem to be a good idea when we need them the absolute most. There are all kinds of reasons to consider getting a loan: the holidays are right around the corner, the washing machine just stopped working, the doctor's bills are sky-high, and you need new tires on the car. You're low on cash, so what can you do?
I'm just going to come out and say it: Do not get a loan unless it is for something you absolutely need; otherwise, you're making a consumption-based purchase, and this is what could get you in financial trouble.
Consider this, you're strapped for cash, the holidays are just weeks away and you've got to get shopping done.
STOP!
Have you looked at the interest rates? Have you considered the fees? Have you considered if it has a fixed or variable interest rate? What about whether or not they have to check your credit score for approval? Have you looked at the collateral and risk of loss?
Or worse, did you know that payday loans can charge you up to 400% APR?
Did you know that your credit score lowers every time there is a hard inquiry on your credit report? Every time you allow someone to run your credit for a loan approval, your score lowers.
Fact: Defaulting on loans accounts for about 60% of our bankruptcy cases here at Woodall & Woodall. I know this is a tough pill to swallow because it can be too easy to get that loan when you think you really, really need it. But unfortunately, so many have to learn their lessons the hard way. Now, let's look into the different kinds of loans and the important points to really consider before you choose to borrow.
What types of loans are you considering?
1. Unsecured Loans- these are loans provided to you with no collateral attached. You'll also hear them being called "signature loans" because really all you need is your signature and a passing credit score in order to get this type of loan.
The upside: You will have the money you need, and given that you make your payments on time every month, your credit score could go up.
The downside: The interest rates (being between 12-21%) are often outrageous because you are considered riskier with no collateral offered! You are a risk to lenders, and you are not in a position where you need to put this kind of pressure on your financial life. If you default on your loans, you're also facing wage garnishment. I kid you not, about 85% of my clients who initially called about their wages being garnished had no idea that there was an effort to reclaim moneys owed. These clients picked up their paychecks one day to see that 25% had been garnished.
2. Secured loans- These often will come with lower interest rates because you offered collateral on them. You might offer your house, your car, your savings account, your paychecks, home equity, any fine jewelry, art or collections, investment accounts, etc.
The upside: Your credit score doesn't have to be amazing because you're offering your personal or business assets as collateral.
The downside: You listed your assets as collateral, therefore, if you default on your payments, the bank or other financial lender will take measures to repossess or gain ownership through legal proceedings. (Source: http://www.cashadvancealliance.com/cash-advances-and-payday-loans-for-the-holidays.php)
3.Payday Loans- Please just don't.
Payday loans are meant to be "in the meantime" loans for when you need cash now, and you can't make it to your next paycheck. Sounds delightful in a perfect world, but these are one of the most predatory kinds of loans you can get.
The upside: Immediate cash
The downside: Fees, the interest rates (which could be the 400% interest rate I referred to earlier in this post), the fast rate at which you have to repay the loan, and the vicious cycle you may find yourself in when you realize you cannot pay what you had initially hoped you would be able to, so you turn to yet another payday loan. There is a big chance your paycheck gets allocated mainly to repaying this type of loan.
4. Title Loans- Got a car? Great! You could list it as collateral for a loan. These loans are based on the value of your car. So, if you have a good car in good condition, you could also get a pretty good-sized loan to help you out in your situation.
The upside: Easily get a loan by listing your car as collateral.
The downside: Risk having your car repossessed should you fall behind on your payments. You may be making your car payments on-time, but find yourself still running from the repo man! This is definitely something to mull over before you list the family car as collateral. The interest rates can get up to 324% APR. As a matter of fact, I spoke to a client years ago who was including a title loan in the bankruptcy. This client's loan balance actually exceeded the original balance after paying 2 months of her minimum payments. EXCEEDED!!
THE PLAN:
Now that we've been over the different kinds of loans, their benefits and their downfalls, let's go over a game plan.
1) BUDGET, budget, budget. Yes, I know it's hard. Yes, I know it takes time that we don't have. Yes, I know that it means we need money to even budget. But if you have next to nothing coming in, you can still allocate it appropriately before you even get it in-hand. If you can, pay off the loan with the highest interest rate first. If you only have one loan, try to pay extra on it every month.
2) Only pull out a loan for things like appliances that you NEED and emergency situations like medical expenses.
3) Make up your mind now that you are not going to pull out a loan for the holidays or any other consumption-based purchase!
4) Consider filing Chapter 7 bankruptcy or Chapter 13 bankruptcy as an option for debt relief. Go here to educate yourself on the differences in chapters. Sometimes it's not avoidable, and that's just the reality of it all.
5) Understand that anyone can fall into financial crisis and that bankruptcy can happen to the absolute best of us! Stay confident and know that your situation is temporary, and there is hope. If you're not quite sure if you're ready for bankruptcy, check out this blog for a confidence booster!
HELPFUL HOLIDAY HINTS
I know that I have spent a lot of time telling you not to pull out loans for the holidays, and I also know that is going to limit a portion of you guys because you were seriously considering doing just that to pay for Christmas.
The truth is, none of us want a Tiny Tim Christmas for our kids, so as an alternative solution to pulling out loans to pay for Christmas, here is how you cut your monthly bills in HALF to afford what you thought you couldn't!
More holiday hints to come....
Next post: Who files bankruptcy?
Other sources:
https://www.credit.com/loans/loan-articles/payday-loans-vs-personal-loans/
http://www.greenpath.com/resources-tools/financial-library/loan-types/personal-signature-loans
https://www.creditkarma.com/article/secured-vs-unsecured-personal-loans-111315
