High interest loans tend to come in many forms and can greatly impact your credit in a negative way. Average consumers tend to get blinded by the low monthly payments and seem to ignore the high interest and long-term length of the loan.
The Ideal Market For Preying On
Credit companies know this and many of them solely market towards individuals who have a bad credit history. These people don’t tend to have access to conventional forms of credit, including personal loans and credit cards. This tends to leave the more well-known options of payday loans, car title loans, and check advance cashing. The fees charged by many of these methods are outrageous.
While it might seem like an easy concept to avoid these high-interest loans, when you find yourself in an emergency situation it may feel like you have no other option. Consumers are agreeing to interest rates of 600% on some payday loans. Many agree to a substantial fee of 10% to borrow a $1,000 loan for a week. If you are unable to pay the loan in one week, the loan will keep increasing by 10% each week. This really adds up overtime and can include additional late fees.
Long-Term Loans To Avoid
When it comes to making major purchases, including vehicles and homes, it’s necessary for many individuals to take out a loan. The typical car loan is for 3 to 5 years. The typical home loan ranges anywhere from 15 to 30 years. While getting a loan is not really an option, as you don’t have $200,000 on hand to purchase a home, paying attention to the loan terms in important for your long term financial success.
You don’t want to get wrapped up in too many long-term obligations that restrict your cash flow from month to month. Paying on a vehicle and mortgage can take a large chunk out of your monthly paycheck. Adding additional things, like major appliances, will start to add up as well. When a large percentage of your income is going towards debt repayment it can be difficult to build up savings for vacations, emergencies, and other reasons.
Putting Things Into Perspective
Before you agree to any sort of loan you really should be asking yourself if the loan is necessary. That loan for a new household appliance because yours is getting ready to break may not be extremely necessary. Rather saving money to put towards buying that item until it breaks is the better option. Even if you don’t have the full amount when it does break, you will still have a large down-payment that will reduce your loan term.
Longer Loans Mean More Interest
Generally, the longer the loan term the more interest you end up paying in the long run. To give an example, if you have a mortgage of $100,000 at an interest rate of 5 percent for 30 years, you will end up paying a total of $193,255. The amount you end up paying is twice as much as the principal amount you borrowed. When you start looking at the total amount you are paying for the entire length of the loan as compared to a low monthly payment, the findings are astounding. You can use this loan payment calculator to assess your total loan fees.
Don’t fall into the high priced loan traps. Save money to purchase the things that you can readily do in a reasonable amount of time. Any other purchases than a home or car are not always a necessity. By saving money now and buying the things you want later down the road, you can save yourself a ton of money by not having to pay interest. When it comes to debt it pays to focus on the long-term view instead of the perspective at this specific moment.