Financial Literacy - Smart borrowing
A cartoon man in red on the rooftop of his yellow house nailing money to his roof with a blue sky and green grass in the background
personal loan
7 brainless borrowing behaviors

2. Car title loans

Some consumers believe that borrowing against a vital asset like a car is a great idea. Never mind that it usually serves as the primary mode of transportation to work.

For unfathomable reasons, legislators disagree. Car title loans are illegal in some states, and in others limits are imposed on the amount of interest that can be charged.

According to the Center for Responsible Lending, most car title loans charge interest with an annual percentage rate of well over a 100 percent and they are generally due within one month. These rates are comparable to those of loan sharks.

Here's how they work: Borrowers secure their loans with their fully paid-for cars at one of these shops. This means that failing to pay back the loan can have predictably severe consequences.

If you don't or can't pay back the loan, the lender will take your car and sell it. And the lender doesn't have to give you back the change either, says Eric Cramer, Certified Financial Planner, an Atlanta-based financial planner with Charles Schwab.

It's hard to decide which is worse: being rendered car-less or receiving a visit from thugs who demand their money in return for allowing you to keep your unblemished kneecaps intact.

3. Tax refund anticipation loans

Why wait for the IRS when your tax preparer will give you your tax refund right away?

One argument against refund anticipation loans is that they cost a lot for what you get.

"They usually have a high interest rate, so you really have to read the fine print. And most people do not read the fine print," says Mechel Glass, director of education for Consumer Credit Counseling Service of Greater Atlanta. "See what the interest rate is -- that is the penalty for getting your money right away. My advice would be: Just wait for your refund."

Taxpayers have several options when it comes to avoiding refund anticipation loans. In the first place, you can skip giving Uncle Sam an interest-free loan all year long by changing the amount that's withheld from your paycheck. That way you give yourself a raise and the government takes only the amount that's owed. Then the refund amount will be minimal, of course.

Alternatively, having the refund directly deposited into a bank account greatly decreases the time spent waiting to get the cash.

advertisement

In addition, borrowers can go to a small bank or credit union and build a relationship. "Then you can get small loans from those types of places to help you build your credit score and have a place to go for smaller loans of $100 or $500," says Glass.

Show Bankrate's community sharing policy
          Connect with us
MORTGAGE HOME EQUITY AUTO CDs CREDIT CARDS
Product Rate Change Last week
30 year fixed 4.29%  0.01 4.30%
15 year fixed 3.23%  0.06 3.29%
5/1 ARM 3.33%  0.12 3.45%
 
View Rates in your area Next
Product Rate Change Last week
30K FICO-based HELOC 4.38% --0.00 4.38%
50K FICO-based HELOC 4.11% --0.00 4.11%
100K FICO-based HELOC 3.96% --0.00 3.96%
 
View Rates in your area Next
Product Rate Change Last week
60 month used car loan 2.63%  0.10 2.73%
48 month used car loan 2.90%  0.07 2.97%
60 month new car loan 3.16%  0.06 3.22%
 
View Rates in your area Next
Product Rate Change Last week
1 Year CD 0.90% --0.01 0.91%
2 Year CD 1.10%  0.02 1.08%
5 Year CD 1.81%  0.07 1.74%
 
View Rates in your area Next
Product Rate Change Last week
Balance Transfer Cards 15.66%  0.01 15.67%
Cash Back Cards 16.36% --0.00 16.36%
Low Interest Cards 10.87% --0.00 10.87%
 
Next
advertisement
FRUGAL NEWSLETTER

Discover new ways to cut costs and save more every day. Reduce your spending, not life’s pleasures. Delivered weekly.

advertisement
Partner Center
advertisement

Connect with us