Financial Fright Night: 13 Loans That Scare Me To Death

by Ron Haynes


Some people claim that fear is based on ignorance, but my personal fear of these financial vampires is based on knowledge. Some of these loans are scary because of how they’re structured, some loans are scary because of what you’re buying with them, still others qualify because of who you’re borrowing from. I plan to stay far away from these loan monsters:

1. Payday loans

Pay day loans thrust borrowers into a debt cycle that can be difficult to break because of their high interest rates and the fact that they’re designed to be extremely short-term. Many borrowers manage to pay only the weekly fee while the principle remains the same and the interest piles up. Payday loans are the monster that seems to never die.

2. Margin loans to buy stocks

Generally you can borrow up to half the value of the securities you wish to purchase and I know there are lots of people who have made a lot of money buying stocks on margin, but I’m not one of them … and I don’t plan to be. Buying stocks with a margin loan can make you a ton of money if the stock increases in value but it can magnify your losses if the stock loses value. If the stock loses large enough (usually 25 percent of the value of your loan), your broker can demand additional cash deposits to your account. If you can’t cover the demand for more money, your stocks can be sold by your broker. If your portfolio really hits the skids, you can end up with no stocks and owe money to your broker. That’s a lot of “ifs” but it happens all the time.

3. Tax refund anticipation loans

The best way to avoid needing this loan in the first place is to adjust your tax withholding. But if you do have a refund coming, getting a loan from your tax preparer is akin to using a loan shark. The interest rates (and fees) are so high they’re scary! You waited all year for this money, why not wait just a few more weeks and save the fees and interest? Hint: you’ll wait less if you use direct deposit to your checking or savings account.

4. Overdraft loans

I haven’t needed one of these loans in 15 years but that’s because I know how much money I have in my checking account and check it daily. These loans are scary because they indicate a lack of attention to your finances.

5. Car title loans

With a car title loan, a borrower secures a loans with a fully paid-for cars at one of these title loan shops. Failing to pay back the loan can have predictably severe consequences. If you don’t or can’t pay back the loan, the lender will take your car and sell it. And in many jurisdictions, the lender doesn’t have to give you back any profit from selling your car either.

6. Co-signed loans

Nothing like the responsibility of a financial obligation with none of the benefits. Co-signing a loan does just that, obligates you to pay for for something you don’t own. Sometimes parents help their children establish credit by co-signing a loan but a much better option is a secured credit card to build or re-build your credit score.

7. Debt consolidation loans

You can’t solve a debt problem by adding more debt. The biggest problem with a debt consolidation loan is that people typically charge their credit cards right back up after paying them off with a consolidation loan. Then they have TWO payments to make. A better plan is to implement a budget and a spending plan.

8. Credit card cash advance loans

Nothing like paying interest from day one, huh? I don’t have a problem with credit cards per se, so long as you pay them off each month to avoid the interest charges. My problem with a credit card cash advance is that it charges interest immediately.

9. Pawn shop loans

After watching Pawn Stars on cable, I’m amazed at how these guys negotiate. They are the masters at what professional negotiators call “bracketing,” where you know how much the other side wants up front, so you start way, way low, hoping to meet somewhere in the middle. The lower the pawn shop responds to the sellers initial offer, the lower that meeting point is. Pawn shops rarely lend anyone the full amount the borrower wants because the pawn shop values your stuff is much less than you do … and they have to make a profit should they have to sell it. When they do make a loan, it’s at exorbitant rates.

10. Loans with a longer term than the life of the product

Taking out a loan with a longer term than the life of the product is a bad deal for every person involved. The lender takes too much risk and the borrower is nuts! Who wants to be paying for something years after it’s useful life ends? If you do, the only incentive to repay is the fear of a lawsuit or damage to your credit report. Avoid any loan where the product will depreciate faster than the principle is paid.

11. Interest only loans

Taking out an interest only loan is like driving with one wheel in the sand – you’re going no where. Whether it’s for a home, a business, a product or a service, interest only loans favor the lender far more than the borrower. Use them with extreme caution in extreme circumstances.

12. Home equity loans

With the recent decline in home values, it’s hard to believe there could ever be people interested in borrowing against their home, but as the economy stabilizes, there’s a better than even chance that people and banks will renew their love of the home equity loan. Why is it scary? When you borrow against your home to pay for something, it’s usually indicative that your spending habits are out of control. Not only that, but to borrow against your home to pay off a car or credit cards, you’re using a 15 to 30 year loan to pay for products or services who’s useful life is only a fraction of those years.

13. Lifestyle loans

No matter what it is, a wedding, a vacation, a honeymoon, a recreational vehicle, a big screen television, hair implants, a car, a tummy tuck, whatever, borrowing money for a lifestyle change is a bad idea for your finances. The “bump” in your lifestyle is usually short lived yet the loan still has to be repaid.

There you have it, 13 of the most scary financial goblins around. I plan to stay far away from each of them.

What other loans or financial products scare YOU?

photo credit: Gilgongo

About the author

Ron Haynes has written 1000 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


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{ 9 comments }

kenyantykoon

student loans- they promise that after you get them you will have no financial problems ever again which is a lie because most of the time one doesn’t get the starting pay that they initially thought was coming their way. this means that you have to struggle with the little cash you make to pay the corporations back the loans that they were literally forcing down your throat when you were young, stupid and desperate effectively enslaving you in your early twenties- a time when things should be simple and life free and pleasant

Ron

I certainly want to stay far away from your lender! I wasn’t made any promises of wealth and prosperity and I willingly signed all the papers for my $50,000 in student loans. I actually pursued the lenders, none of them pursued me.

Credit Card Chaser

I couldn’t disagree with you more. Borrowing money to buy an appreciating asset (in this case an education that will enormously improve one’s lifetime earning power) is almost always a great thing.

Patrick

Ever since I was denied trading on margin via my online brokerage account, I decided to take out payday loans to buy stocks. You really have to hit a home run to make it work though, so I stick with the penny stocks and the hot tips I get in my e-mail every day… usually about oil derivatives and other stocks in the energy sector. I jest, of course!

You hit the nail on the head here, and most of these loans can be avoided by simply living within your means and not giving on to consumerism.

Pawnonomics

Ron, I do not feel you’re giving pawnshop loans a fair shake. Pawnbroking is the oldest form of consumer credit and hasn’t changed much in thousands of years. This is not by accident. Pawn loans are the most civilized and reasonably priced source of short-term consumer credit. Many independent studies have shown this.

But the biggest difference between pawnshop credit and those that you list in your post is that a pawn loan is the only form of consumer credit where the borrower actually has a choice of whether to repay the loan or not, and if choosing not to, the only recourse is the loss of the personal property pledged. No lawsuits, no bad credit reporting, and no negative consequences. Also, contrary to your belief and any television shows, a pawnbroker’s biggest goal is to loan the customers as much as they require to cover their short-term situation. It’s what we do.

Steve Krupnik, 30 year pawnbroker and author of Pawnonomics

Ron

Well, a couple of things.
1. My experience with pawn shops is very limited and all of it is bad. My wife secured a loan against a classic Martin guitar, a .25 cal handgun, and some jewelry that her mother left her in her will when we were dirt poor and I was stuck in a crappy car 400 miles from home with zero cash. When we went back to get our items 30 days later, the shop owner said “too bad, they’re mine now, you were one day late coming back to get them and a deal is a deal.”
2. When we DID go to get that cash, the owner lent us less than 10% of the value — since we were young, naive, and desperate, we agreed. Looking back on it 15 years later, I feel we were rooked .. but that happens when you’re young, naive, and desperate, or maybe just desperate!

Pawnonomics

Sounds like your wife received this loan from a CROOK. Any pawnbroker worth his salt would have happily paid off the loan and returned the items.

The good news is that for every horror story such as yours, there are thousands of positive ones.

Matt

I love this post.

I think the scariest loan (by far) is the co-signed loan. Putting your financial well being in somebody elses hands?

To take a friend to a bar and say, “Hey… drinks on me” is one thing.

But to go to a Car Dealership and do the same? Not THAT is scary!

Angelin Parker

Hi,

I agree with you that in most cases a loan is not in the favor of the borrower but sometimes you are in extreme need of cash for any type of emergency. It happened to me couple of times before and my best choice was pink slip loan through City Loan — it worked best for me.

Thanks

Angelin

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