We all struggle with emergencies and other financial constraints at some point in life. For many, loans are an excellent way of solving such financial dilemmas. But wait a minute! Are they the best source of financial aid? In most cases, No! There are various lenders and credit products in Canada. Some are very enticing with no credit checks or need for collateral. Nonetheless, there are multiple types of loans to avoid if you don’t want to plunge into more debt.
What are the types of loans to keep off?
With the different loans available, it can be daunting to determine the best source of financing. Many people seek personal loans that feature high-interest rates and fees; these can easily ruin your credit score further if you’re unable to repay as agreed.
Check out some loan products to avoid:
- Payday loans
In these tough economic times, payday loans are a quick fix for emergencies. They are also handy for anyone who can’t cater to their short-term expenses. The loan application process is simple, and you can apply for the loan online via phone.
Seems interesting? Not really! Payday loans and other short term loans have several flaws. They come with high-interest rates and fees and can quickly accumulate large amounts of debt. To avoid this, why not use lendforall to determine the best lender for your needs? It’s a loan matching services firm that helps you connect with the right financial institution in Canada.
What’s more? With this type of loan, the payback period is short, and you’re expected to pay back immediately to get your next paycheck. Although you can ask for an extension, this is costly, and you may end up paying more than what you owe. A payday loan may require your entire paycheck, and if you’re to apply for such a loan, be sure that you can afford the loan amount.
- Car title loans
Car title loans are typical among car owners with poor credit. To qualify for the loan, you give your vehicle as collateral or security for the loan awarded. What happens when you default payment? Putting up your ca as collateral gives the lender power to seize it. It’s easy to lose your car if you don’t pay. Car title loans are high risk, and you’re better selling off selling your vehicle to sort your financial issues than gambling it with a financial institution.
- Pawnshop loans
Pawnshops offer short-term loans to borrowers against collateral. These can be a valuable item like a mobile phone, cooker, laptop, refrigerator, and other household items. But, they feature excessive interest rates, which make it hard to pay off the loan. Also, some lenders charge storage fees for holding your item until you pay the loan. Here’s the bait, if you can’t pay the loan in full, you risk losing your items and any prior payments made.
- Tax refund anticipation loans
Many Canadians apply for tax refund anticipation loans with little or no knowledge of how they work. With these loans, you submit your income tax retunes, and the lender issues a loan to be cleared using the amount of the tax refund. A tax refund anticipation loan is risky because you’ll still have to pay the loan even when the IRS rejects the tax return. And this involves the loan amount and the accrued interest.
That’s not all, though! These loans come with very high-interest rates of up to 36%; the loan cost can be too high that even your tax refund may be unable to cover it. Moreover, if your refund doesn’t match your loan amount, you pay the difference, which is not deductible on your subsequent returns.
- Credit card cash advance
A cash advance is a form of a short-term loan usually offered by the credit card issuer. It’s a way of borrowing against your cards. It’s an easy cash option for many borrowers with a bad credit history, and loan approval is never a hassle.
How does it work? You can visit your bank and request an advance using your credit card. You can also use a convenience check that comes with your credit card to write yourself a cheque and later cash it. You can also go to any ATM with your credit card and PIN and get cash. However, a cash advance can be very costly due to the high transaction fee and interest rates. Interest on credit card cash advances also compounds each day.
- Unsecured high- interest lines of credit
These are mostly unsecured loans, with no need for collateral to apply for the loan. They are attractive options for borrowers and don’t require lots of paperwork. But feature high-interest rates, and getting your loan approved is quite tricky. Unsecured credit lines are costly, and the loan amount can accumulate very fast, making it harder to pay up. These loans also offer flexible payment options and can lure one to overspend.
Why are high- interest loans costly?
Short-term high-interest loans are very enticing. They are easy to apply and, in most cases, don’t require credit checks. But, they are hard to pay due to high-interest rates and fees. A small loan amount can pile up to vast amounts of debt within a short time, making it harder to bear.
Although many loans don’t require collateral, they are high risk and can’t compare to secured loans. It’s not easy to pay such loans, which can significantly lower your credit score.
How can you avoid dangerous credit products?
As mentioned earlier, short-term loans come with high-interest rates and are high-risk sources of financing. There are various ways to avoid these dangerous products. Firstly, set an emergency fund for your unanticipated expense. It will offer you immediate access to cash in case of emergencies.
If you must apply for a loan, take advantage of loan comparison sites. They will help you locate a lender with better loan terms. Lastly, avoid loans with strict terms and high-interest rates and fees. Only apply when you’re confident that you can pay the loan on time.
Final thoughts
All loans come with pros and cons. The next time you apply for a loan, research thoroughly about the products and the interest rates. Also, check any other associated fees that can add up to your loan amount. Make short-term loans your last resort, and instead consider other options.