Friday, February 2, 2018
The Scoop on Loans: 7 Common Types
This week at Budget Boss was all about loans. I touched on credit cards, consolidation, car loans and even bankruptcy. The truth is that you can get a loan for just about anything these days. I remember going to a department store to buy a new microwave and the cashier asking me if I wanted to do their financing plan. The microwave cost $85. I can understand them offering the plan, but who uses it is the question? The answer to that is many people. Many people finance stuff that they should be buying. Many people get in over their heads when it comes to credit and loans. My reason for featuring a week specifically on loans is because loaning someone money is the greatest way to hold them back. Owing someone money is a gross feeling. Even grosser is when you know you must pay that loan back with an absurd amount of interest. You think it’s not a lot, only a little bit every month. But when you stretch out the time it takes to pay back the loan you see it adds up to a large amount. In today’s post, I am going to talk about 7 styles of loans that can get you into trouble. I will describe each one and show the negatives about what they offer.
1) Lines of credit
Lines of credit are very useful, versatile and often an affordable alternative to pricey credit cards. You can get lines of credit that hover just above the prime interest rate which is around 3% right now. That is an affordable way to borrow. The issue with lines of credit is that in my opinion, they are too easy to use. They don’t have the mental stigma around them like credit cards do. They also often have higher limits than your credit card, so you can get in deeper. You can put money on and take money back out. It is like your own personal bank account with a seemingly unlimited supply of money. We have to understand that anytime a lender makes a product easy to use, they are essentially making it easy to abuse. We must be careful when it comes to lines of credit because most of them get spent on junk rather than essentials.
2) Home Equity Line’s of Credit
HELOC’s are a great way to get yourself into serious trouble. For the savvy budgeter and investor, HELOC’s can provide a very useful tool to keep you cashflow positive at all times. You have the flexibility to invest when you want, pay lump sums on your home when you want, and make upgrades when you want. The problem with HELOC’s is that they provide you with an even bigger source of credit. A line of credit on your home is like playing with fire for some people. In my opinion, the purpose to own a home is to actually own it, outright. Continually borrowing against it only prolongs the process and has the potential to get you into some massive trouble. Do you really want to be 80 years old with a mortgage? Like I said, there are some plusses to the HELOC, but first, you must understand yourself and your spending habits before you take the plunge.
Home Equity Lines of Credit (HELOC’s) – Budget Boss
3) Pay Day Loans
I am going to say this right off the bat. These types of loans are fucking bullshit and should be illegal. Sorry for the swearing but I am very passionate about this topic. Pay Day Loans are essentially legalized loansharking. They charge you interest rates that are absolutely criminal, reaching the 900% range at times. Even worse then the rate of interest is the vicious cycle they put you in. Let’s look at an example. You make $1200 every 2 weeks and this week your car breaks down, so you need a payday loan. You borrow $1000 and owe it the next time you get paid. On that loan, you pay what seems like a small amount of interest, $95. Once you get paid, you pay off the loan and the interest, but now you have no money for 2 more weeks. So, you take out another payday loan to get you through. The cycle has begun and now you are trapped. If you owe on Pay Day Loans you must get out now. Do whatever you have to do to stop the cycle. It will literally bankrupt you. If I ever become leader one day, these things will be gone immediately.
6 reasons to avoid payday loans – CreditCards.com
4) Student loans
The good old student loan. There is said to be good debt and bad debt. One of the “good” debts society has pushed on you is student debt. I personally don’t see how someone owing 25K or more to start their young life can be seen as good, but here we are. You gained the knowledge, you have the skills, now all you need is the job to pay off this debt. The first bill I got from OSAP was $676 a month to pay back my loan. I almost puked. At the time that was more than my rent and more than a third of my income. Student loans must be treated with extreme caution and I am looking straight at you parents. If you have children heading off to university have an open and frank conversation with them about student debt. I was young and dumb, and it seemed like a great idea at the time. Little did I know it would take me 7 years and a lot of heartaches to pay that debt back. Also, if you must take out a student loan or line of credit, take out as little as possible. It might be the fire you need to stay debt free.
Hey OSAP…..F*** YOU (The Student Loan Dilemma) – Budget Boss
5) Cash advances on your credit card
Another one with an interest rate that should be illegal. Cash advances on your credit card start accumulating interest the day you take them out. I have seen people who use these advances to take out money for the bar that night. Do you really need $40 that bad? The interest on these advances is just plain insane. Is it wise to pay $50 for a $200 cash advance? Every time I hear about someone uses this service I cringe. I did it once when I was young a dumb. That was enough for me as when the bill came back at the end of the month I almost puked again. Make sure you understand the terms of this type of loan, or you will get burnt.
What’s a Credit Card Cash Advance? – The Balance
6) Overdraft
My bank is funny. They always ask me if I want overdraft protection. My response is: Do you see my balance? Does it look like I need or want overdraft? Overdraft is an amount the bank will allow you to go into the negative for your account. They don’t do this for free, however, as the second you go one cent into overdraft you are charged a ridicules fee. I remember I lived in overdraft so long I learned how to count backward really well. Every month I would get to the $0 level and then boom back into overdraft. The fee for my stupidity was $45 a month. I loved being charged for being poor, but alas it wasn’t the bank’s fault, it was mine. If you are in overdraft, you must get out of it. Build up a balance that becomes your new $0 balance so you never have to use it again. It will make your life a lot less stressful and save you a ton of money as well.
7) Small business loans
This is a tricky one. Being an entrepreneur myself, I see the lure of the small business loan. The problem is that your great ideas and solid business plan don’t always amount to a successful business. You must be extremely careful when taking out a small business loan as if the business goes sour, you are still on the hook for the money. I would rather save money for a bit while working on my idea than taking out a loan. I know several people that have those loans hanging over their heads several years after their business closed. Any great idea is worth putting your own money behind it. It will get you fully vested in what you are doing.
Loans are a funky thing. The idea of them always makes me cringe a little, but many people have ways to justify heaping debt upon themselves. My thoughts are this: Always proceed with caution when borrowing money. I remember the worst times in my life financially always involved borrowed money. It was only after those days were done that I could think clearly and make wise decisions.
Thank you for tuning into Loan Week here at Budget Boss. Don’t forget to join us next week when I jump into another topic regarding personal finance. If you would like to discuss your loan and debt issues, please do not hesitate to contact me at joe@budgetboss.ca. Have a great weekend Bosses and enjoy the Super Bowl on Sunday!
“We tend to focus on assets and forget about debts. Financial security requires facing up to the big picture: assets minus debts.” – Suze Orman
Email – joe@budgetboss.ca
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