What to Know Before You Choose a Loan to Finance Your Business or Your Life

Borrower Beware


All loans are scary, because you are signing yourself over to a debt; but some loans are much scarier than others. Some are scary due to the product you are purchasing; some because of who the money is being borrowed from; and some due to their very structure. It is a sound plan to know what type of agreement you are entering into.

It is a good idea for your financial well being to avoid these loan monsters:

  1. Lifestyle loans. Whether you are taking out a loan to fund a vacation, a big-screen TV, plastic surgery, a wedding, or something completely else, loans for lifestyle changes are bad for your finances. Usually the improvement in lifestyle is short-lived, and then you still have loan debt to be repaid.
  2. Home-equity loans. Considering the way that the bottom dropped out of the housing market in recent years, its amazing that anyone would want to risk borrowing against and their home. As the economy begins to improve, it is very likely that the home-equity loan will regain its former popularity with banks and consumers alike. When a person borrows against their house, it can be a strong indication that their spending habits are out of control. Many people that do take out this type of loan do so to pay off a car loan or credit card bills, which is not wise because a home-equity loan is a 15-30 year loan being used to pay for products or services which will only be useful for a fraction of that time.
  3. Interest-only loans. Taking out an interest-only loan does not get one any closer to paying off the product the loan paid for. These loans only benefit the lender, because the consumer pays interest indefinitely, way over and above the amount they would have paid for the product to begin with.
  4. Loans with a longer term than the useful life of the product. No one wants to continue paying on a product after its useful life has ended. It’s very risky for the lender, and any borrower who would knowingly do this must be crazy. The only incentive to pay off such a loan is the threat of a lawsuit or damage to your credit report.
  5. Pawn shop loans. Pawn shops value your sellable possessions much less than you do, and thus almost never lend the full amount that the borrower wants. This is because the pawn shop wants to be able to make a profit on your electronics, jewelry, or other valuables should you not repay your loan and they have to sell your possessions.
  6. Credit card cash-advance loans. Credit card cash advance loans start charging interest immediately, not every month like regular credit card use. A person would be better off just using their credit card regularly, and paying it off at the end of the month to avoid interest charges.
  7. Debt-consolidation loans. Debt + debt = debt. Most people who get a debt consolidation loan wind up running up the credit cards again they used the loan to pay off, which completely defeats the purpose. Then they are back to having multiple payments to make. It is much wiser to compose a budget, and stick to it.
  8. Co-signed loans. Co-signing a loan can be very dangerous because it obligates you to pay off the loan, should the other party fail to pay it. Why would you want to pay for something that you didn’t own? Sometimes parents will co-sign a loan for their children to help them build credit, but a secured credit card is a much safer option for that purpose.
  9. Car title loans. Unless you like the possibility of losing your car, taking a loan from a title loan shop is not smart. If you fail to repay your loan, the lender will take your fully paid-off car and sell it. The lender also does not have to return any money to you, when they profit from selling your car.
  10. Overdraft Loans. If you need an Overdraft loan, then you should be paying more attention to your bank account. This type of inadequate attention can get you into financial trouble. Know how much money you have, and don’t spend more than that amount
  11. Tax refund anticipation loans. If you have a tax refund coming, you should never get a loan from your tax preparer. If you really need your tax refund money faster, have your paperwork e-filed, and ask that your refund be direct-deposited into your checking or savings account.
  12. Payday loans. Taking out a payday loan is the beginning of a vicious cycle of debt that is very hard to break. Payday loans are designed for very short periods of time, usually up to only a month, and have very high interest rates which make it hard for borrowers to catch up. Many only manage to pay the weekly minimum, which doesn’t even cover the full interest.
  13. Margin loans to purchase stocks. There are people out there who have made a lot of money by buying stocks on margin, but this is only when they are lucky enough to have the stock they bought increase in value. If you take out a margin loan, and your stocks decrease in value, the broker can demand cash deposits to your account to cover the loss. If the loss is bad enough (usually 25% of the amount you borrowed) the broker can sell your stocks, and you could end up owing money to your broker and having no stocks at all.

For the sake of your pocketbook, avoid these loan monsters. More often than not, they do more harm than good on the borrowers side.


Author Box
George Martin is mortgage loan expert also he provides expert advice on credit card balance transfer and credit card management.. He provides advice on high interest credit card and sensible credit transfer.

Thank you, George, for this practical advice.

–ME “Liz” Strauss
Work with Liz on your business!!

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