The 3 Worst Ways to Borrow Money

As the economy remains shaky and banks tighten their borrowing criteria, many consumers look for new sources of funding as a result. Some avenues are straightforward and understandable. Some are not however. They have a high interest rate, fees and charges. Some of these are not obvious at first glance. Here are the three worst ways to borrow money.

Title Loans

If you own your car free and clear, you may be eligible for a title loan if the car still has value. The lender holds the title of the car until your loan is repaid in full. While this is a fairly easy way to get small amounts of cash, your loan comes with high fees along with a high interest rate. The minimum monthly payments required often don’t include any principal paydown. Thus it is easy to maintain a high balance and pay more in interest rate. Because this type of loan is secured by the title to your vehicle, you may lose it if you default on your loan.

Pawn

People in dire straits use pawn shops as a source of fast money. You leave something valuable as security for the loan. The pawnbroker can sell it if you do not repay the loan. The benefit for those with poor credit is that the pawnbroker won’t run a credit check. This is because the loan is fully secured. The downside is that the fee and interest rate charged make these loans one of the most expensive methods of borrowing available.


Reverse Mortgages

These misnamed loans are advertised heavily to seniors who have equity in their homes. What they don’t have though is the income to qualify for a conventional mortgage. Often, these are even touted as a way to pay convention mortgage payments still existing on the house. The loan amounts accumulate until the borrower dies or sell the house. Then a full pay out is required. The fees and accrued interest rate often drain the equity out of a house ad leave the heirs with a difficult financial situation. This is even truer today when many properties have mortgages larger than the value of the home.


The Bottom Line

There may be times in life when borrowing from an alternative source makes sense. However, reviewing the terms and conditions of the loan and knowing all of the associated feed and interest rate can help you avoid the dangers of consumer.