Is there really a good loan?
I suppose that if you consider a house as an investment instead of something you use to live your daily life, then a house can be a good thing to take a loan out to acquire. I’ve heard some say that it is not an investment unless it puts money into your pocket. Technically, that means that the house you live in is not an investment because it sucks you dry with all the things to take care of. The mortgage charges you interest making it cost 2-3 times the purchase price for a house.
A house loan is still a good thing since it offers you a dwelling place. The nicest thing about a house is that usually, when the time comes to sell the house, you can sell it for more than you purchased it for. That’s not a guarantee as we saw after the 2008 housing market crash.
So where do you get a “good” loan?
In my thinking, you can get a good loan from a bank or credit union. Even better, borrow money from your grandparents. Grandparents have a habit of loaning money to their grandkids at zero interest and no real timetable to pay it back. At least some work that way.
Credit unions are good because when you have an account with one, you own shares, not just an account to keep your money in. Credit unions pay dividends to your account.
Banks are just a repository for your money. They pay interest on your account too but the amount is so small these days, you may as well put the money under a mattress.
Not so good loans
Ok. Up front, I am a bit biased when it comes to loans. There are two places that I think are probably the worst places to get a loan. Payday loans and Car Title loans.
Payday loans say they are providing a “service” to get you to the next paycheck. That’s true but how much sense does it make to take out a loan to pay your other bills? The interest on payday loans is huge. Usually the interest is based on a fee of $15 for each $100 you borrow. If you borrowed $500, the fee would be $75 and that is due in just two weeks max.
What happens if you cannot pay the total amount within the two weeks? You get more fees added and must take out another loan. This can lead to disaster. If you do this enough, then you can fall into escalating fees.
The next payday, you have a smaller check because the money you borrowed along with the fees has to come out then.
Wouldn’t it be better to get out of the cycle of living paycheck to paycheck in the first place?
photo credit: SeniorLiving.Org
The other loan that is troubling to me is the car title loan. Here’s how this one works. You take your title (you must have a clear title to begin with) do the car title loan place. They appraise your vehicle (car, truck, motorcycle) and give you a loan up to the appraisal value of your car. All is good so far – right?
If all goes well, you pay back the loan over a period of time and get your title back.
But what happens if you don’t pay the loan back according to the terms? You guessed it – you lose your car!
Want to learn more about car title loans? Check out this report from NBC News.
I was recently invited to attend a seminar about payday loan places and ways to produce legislation to close them or at least help protect consumers from predatory lending practices. Unfortunately, I was unable to attend due to a comedy of errors. From some information that I have read, it appears that the is only one state in America where the interest on payday loans is limited to about a 35 Annual Percentage Rate (APR). The rest can range from 50% to well over 300%. That’s a ton of interest to satisfy an itch for two weeks.
Talk to someone about your finances if you feel you are in trouble with them. Consumer Credit Counseling Services are a good place to start. Many churches offer financial classes also. Get away from living paycheck to paycheck.
Here’s a thought. How many people who have some money put away would ever consider taking out a payday loan or a car title loan? I suggest that you would not find anyone.