A sign directing foot traffic to payday loans

10 loans to avoid taking out

Taking out a loan is a great idea under the right circumstances. If you need some emergency cash, can afford to pay off a little interest to get a better deal on a car or require some capital for your business, then getting a loan with a reputable lender is a good option. But not all loans are advisable. 

Some loans, known as predatory loans, willfully deceive borrowers by hiding terms and conditions. Their terms are constructed so that borrowers are almost certain to end up regretting the decision to take out the loan in the first place.

These are the loans you should avoid whenever possible. Though it’s not a given that they will be inordinately unfair, they have typically proven to be. Read on to find out why.

1. Payday loans

The concept behind a payday loan is simple: you need money immediately, are still a ways away from payday (or whatever bonus may soon befall you), and take out money with the expectation that you will pay it back with interest once those new funds come in. In theory it seems reasonable, but in practice it can be quite dangerous.

Many payday loans give lenders the power to escalate things very quickly. Even if the common fee of $15-$30 per $100 borrowed seems reasonable at first, it won’t once someone misses the payment deadline and super high interest rates kick in. Suddenly you’ll find yourself with a mountain of debt that you will likely find it difficult to repay if you needed a loan on such short notice in the first place. 

2. Instalment loans

Based around intermediate-to-long-term borrowing, instalment loans put a lot of pressure on a borrower to consistently make large payments over an extended period of time; hence the term “instalment.”

Because instalment loans come from alternative lenders who cater to a crowd that can’t always qualify for bank loans, they tend to charge exorbitantly high interest rates in order to offset their risk. Though they won’t exceed the 60 per cent legal interest limit in Canada, they may very well come close. Stretch that out for long enough or miss some payments and you’ll find yourself in a crippling cycle of debt.

3. Casino credit

This should probably go without saying, but taking out money that you intend to gamble with is a terrible, terrible idea.

Sure, there’s a chance that you win big and end up debt-free, but your life isn’t some Hollywood movie where things will simply work out because you’re the protagonist. Casinos are designed to win more often than they lose. Taking advantage of casino credit plays right into their hands.

4. Private student loans

There are justifiable reasons for private student loans to exist. If someone doesn’t qualify for as much government tuition assistance as they need for tuition, or if they need money for food and living expenses that wouldn’t be covered by the government, then a private student loan is at least a viable solution.

Here’s the thing though. Private student loans charge way more in interest rates than a government-sponsored program would. Plus, they generally give you a lot less flexibility in terms of repayment. So if you don’t land a well-paying job right away after graduating, then you could find yourself in a tough spot.

5. Tax refund anticipation loans

These loans are sort of like payday loans, except instead of you coming to a lender with a need, a tax preparation company is dangling a carrot in front of you, hoping you take it so that it you can pay more for it later. What that means in non-figurative terms is that the company has notice you’ll be receiving a tax refund in the near future, and it wants to give you the option to get that money today, in exchange for interest fees.

Tempting as it may be to have some extra money in your pocket in the short-term, it’s a pretty raw deal for you. These tax preparers get money for nothing while you end up with a debt that you had no initial interest in. When they come calling with the offer, just say no.  

6. Auto title loans

Like every other type of secured loan, auto title loans involve putting down an asset—in this case, a car—as collateral. So why did this one make the list while every other type of secured loan didn’t?

It comes down to the way they are structured. More often than not, they’ll come along with demands that amplify the risk of hedging with your vehicle—think triple-digits APR, small repayment windows, etc.

7. Overdraft protection payments

While the fees associated with overdraft protection payments aren’t quite as bad as some of these other loan consequences, they’re probably an unnecessary annoyance that you should do your best to avoid paying.

Overdraft protection kicks in when you want to purchase something or make a payment but have insufficient funds. A lot of the time people don’t even realize they have it. When you go to make the purchase, the bank will loan you the money, but only after attaching a repayment fee to it.

Although this can be useful if you’re truly in a dire situation, paying a fee because you forgot to replenish your account is just silly. Stay on top of things and don’t put yourself in that position.

8. Credit card cash advance

Credit card cash advances are another type of banking option that just take money right from your pocket. The gist of them is that you get cash that you haven’t actually earned yet, but you’ll be charged an advance fee that is either a percentage of what you took out or a set dollar amount (usually depending on which is greater). You’ll also have to pay interest if you don’t get it back within a set amount of time.

Obviously we all need money sometimes, but if you’re going to borrow, this isn’t the way you want to do it.

9. Pawnshop loans

Pawnshop loans have their advantages. They are simple and don’t necessitate the same sort of drawn-out process that going to a financial institution for money would. You just show up with an item for collateral, agree to the terms of a deal, and walk away with money.

The downside to all of that is that you’re allowing yourself to lay a lot on the line. Even if you get a better deal with one than you would on a payday loan, you’re still betting big on yourself to come through. Unless you’re sure you’re going to be able to come through (or don’t mind losing whatever object you brought in), it might be best to pass up the convenience of a pawn shop loan for something more bureaucratic.

10. Advance fee loans

Also known as the ‘scammer loan,’ advance fee loans have a dangerously high track record of turning out to be nothing more than theft. How it usually works is you’ll see an ad for a no-hassle, guaranteed loan that only requires you to pay a small fee in advance. Except then, instead of receiving the funds, you’ll never hear from the ‘lender’ again and be down whatever you paid.

It's important to keep in mind that it's not always the type of loan that makes it a wise or unwise financial decision. Ultimately, your decision should come down to the terms governing the loan. Be sure to read any contract thoroughly, so that you can make an infromed decision, and only work with reputable lenders. If you take out a loan you're going to have trouble paying back, it'll put you in an unenviable situation, and unfortunately, it won't be as zany as it is on television.