From bad to worse: avoid these debt traps

By now, everyone has heard me say “all debt is bad debt!” Still, some types of debt are worse than other types. We tend to incur this debt when we’re desperate, and it’s very hard to pay it off.

Do whatever you can to avoid these debt traps:

Payday loans

Payday lenders offer small loans ($100 to $1,000, say, with an average term of two weeks) to get you through till payday. While the loans are small, the interest rates and fees are not! Payday lenders charge 400 percent interest and up, and they’re aggressive about collecting if you can’t pay back the loan on time. It’s better to be late on a utility bill than to fall prey to a payday loan. For more information about payday loans, visit the non-profit Payday Loan Consumer Information Center at https://paydayloaninfo.org/facts.

Rent-to-own

When your budget doesn’t allow for new furniture, electronics, or appliances, it’s tempting to succumb to those glossy rent-to-own sales papers that we get in the mail. It’s a bad deal, though. If you rent-to-own a $450 TV, you’ll make 52 weekly payments of $20 each, which means that you’ll end up paying $1,040 for the TV—that’s more than double the cash price! The truth is, most rent-to-own merchandise is a “want” and not a “need.” Instead, try buying gently used furniture and appliances on craigslist or at a second-hand store.

“Tote the Note” used car lots

These car lots sell older, cheaper used cars. That sounds great, but here’s the catch. The cars aren’t worth much, so the down payment you pay is what the car dealer paid for the entire car. That’s right: You could have bought the car yourself from the original seller if you had shopped around! These car dealers break even with your down payment, and the monthly payments you make—often at 18 to 38 percent interest—are pure profit. Here’s a better way to buy a cheap used car: https://www.mrmoneymustache.com/2011/04/19/how-to-come-out-way-ahead-when-buying-a-used-car/

Title loans

If you already own a car, you may be tempted to take out a short term loan using your car as collateral. Try to resist the temptation, however, because these loans are expensive and can easily result in your car being repossessed. Title loan companies charge hefty “loan origination” fees that they add onto your balance, and they charge high interest rates (often 25 percent PER MONTH!). Due to the high interest and fees, it’s very hard to pay off these loans, and again, the risk of repossession is high. Get more information here: https://www.consumer.ftc.gov/articles/0514-car-title-loans

It seems like everyone is trying to get us to borrow money or to buy expensive goods, but most of these offers are too good to be true. At times like this, it pays to remember our long-term goals.