Loan Types – CreditCube

Payday Loans

Surf the web for advice and you’ll find that people in the know all agree − stay away from payday loans. A payday loan is, in effect, an advance on your salary. The hitch is that you have to repay it in its entirety when you receive your next salary, plus interest, and usually they provide you with very little flexibility. Since people usually take a payday loan as a last resort, chances are they won’t be able to pay the loan in full on their next payday. This can be problematic since most people end up paying just the interest on the loan and roll over the entire loan principal to their next payday. This practice merely reschedules their financial problem to a later date while racking up more interest and fees on their outstanding loan. The cycle is addictive and the interest can eventually become unaffordable.

Bank Loans

Banks, of course, offer a number of different interest-bearing loans, most of which are considered installment loans. These may require a review of your credit score and banks generally approve a personal loan if your credit score is above a certain threshold. However, should you miss a scheduled payment, your credit rating might suffer, and as a result, your ability to take out another bank loan or a mortgage, even at a different bank or in a different state, may be compromised.

Overdraft Loans

Overdraft protection functions as a different type of bank loan. In exchange for allowing you to go into overdraft, your bank will charge you a fee of $25-$35 per transaction in return. Overdraft protection, however, is not available to everyone. You have to apply for it and be accepted. Often, a bank will link your overdraft ceiling to a savings account as a type of collateral, ensuring your ability to repay. Assuming you do have overdraft protection, there is no set time period for paying it off as long as you’re paying the interest on the overdraft itself. And that can be a huge obstacle, since overdraft interest rates are by far the highest in the industry, with annual percentage rates (APRs) exceeding 1,000%, depending on your specific situation.

Credit Card Loans

A far more affordable form of a bank loan is a credit card loan. A credit card loan is not granted by the credit card company itself, but rather by the bank that issued you the credit card. Of course, a credit card loan can only be provided to the holder of a credit card, and credit cards are not generally issued to consumers with bad or unstable credit histories. Moreover, the maximum amount of charges that can be made on a credit card is based on your credit limit, and if you have reached it you cannot exceed it.

Auto Title Loans

Finally, if you own a car, there are about 20 states that permit you to place a lien on your vehicle’s title and temporarily surrender it to a lender in exchange for a short-term loan. The car serves as collateral. The benefit is that lenders of auto title loans do not need to take the borrower’s credit history into consideration, since ownership of the vehicle will be forfeited if the loan is not repaid. An auto title loan, therefore, can be made for any amount up to the value of the vehicle itself. The disadvantage is that auto title loans are usually very expensive and are unavailable in the majority of states. Furthermore, in the minority that permit them, you cannot receive one if a bank lien currently exists on the vehicle.

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