There are as many reasons to take out a loan as there are excuses for anything else in life. However, the reasons one may take out a new loan typically falls into one of a few main categories. Let’s look at the top five reasons why people take out installment loans for bad credit.
To Take Advantage of Discounts
This is the stupidest reason to take out a loan, though it is surprisingly common. Retail staffers are taught to push credit cards and penalized if they fail to do so with every customer, because the store credit cards are so profitable for retailers. Know that retailers have done detailed analysis to determine just the right discount to offer to maximize the odds you sign up while setting an interest rate that maximizes their profit. That 20 percent off a 200 dollar purchase is thus guaranteed to earn them more than 40 dollars in profit over the average length of the loan. These loans are structured to bring you back to the store to avoid annual fees. They’re also the hardest accounts to close.
To Cover Little Expenses
This category is different than the store credit card. It is when someone gets a credit card to simplify their financial management. Ring up the daily latte, tollway tolls and daily lunches. At the end of the month, you pay the payment and say you’re done. It seems more convenient than carrying cash. Unfortunately, you spend twenty to thirty percent more when you use plastic instead of cash. Furthermore, you pay interest on the debt that’s carried over to the next month. That can result in you paying twice or triple the actual cost of the item by the time you pay off the associated debt. This is also why financial counselors suggest switching to cash to curtail impulse spending.
Note that a debit card can be used to do everything you normally do with a credit card. Its only limit is the money in the account. Link a debit card to a savings account in case of an overdraft to minimize excessive fees. However, the best step you can take is to monitor and control your spending. You’ll spend less as a result, and you’ll be better able to save for the future.
To Cover Emergency Expenses
Debt is sometimes necessary to pay the bills we can’t pay out of our emergency fund. This occurs when your car repair is two thousand dollars more than your emergency fund. It may be the medical bills that arrive after accident are more than you can cover after you’ve been out of work for a week. You should aim for an emergency fund large enough to cover unplanned expenses of several thousand dollars. This allows you to avoid going into debt to pay for common financial emergencies like car repairs, home repairs and common medical mishaps. Then any debt you have to take out above and beyond this is likely to be manageable enough to pay off once life returns to normal.
Look for bad credit personal loan products that don’t cost you an arm and a leg. Learn about your options now, because people tend to sign up for the first extended offer when they’re under pressure, no matter how much it costs.
To Make Major Purchases
It is common to take out a loan to pay for major purchases. Too many of us buy new cars on credit instead of paying it off and driving it a little while longer. It is terrifying how many people roll old car debt into a new car loan and act as if ‘negative equity’ is a good thing. They’re tying up their money into something that goes down in value as it wears out. This is why car loans are less than desirable.
A mortgage is more justifiable. Real estate almost always goes up in value. More importantly, mortgages are structured to progressively pay down the loan. You build equity in an asset that you eventually own outright. And by doing so, you eliminate one of the biggest line items in your budget. Beware the temptation to borrow against your home equity to pay for nice-to-have renovations. Protect your home’s value and your finances in general by saving 1 to 2 percent of the home’s value every year to pay for the maintenance and repairs the average home requires. That is in addition to a standard emergency fund to cover everything from job loss to medical bills.
For Debt Consolidation
It isn’t an oxymoron to take out a new loan for debt consolidation. For some, taking out a single large loan to pay off all their smaller loans is simply a way to get control of their finances. Then you only have to manage a single monthly payment instead of tracking ten or more bills each month. In many cases, the new loan actually comes with a lower interest rate. Beware of the temptation to move debt from one credit card to another to try to take advantage of low teaser rates. This hurts your credit through the sheer churn of accounts. It raises the risk that you’ll leave an account open that results in charges you didn’t pay off, hurting your credit. The energy and effort you put into moving money around could be better spent getting control of your spending and paying the debts off.
We will admit that this is harder when you’re facing 10 to 30 percent interest. And that’s why debt consolidation loans may be a good first step in paying down your debt. A common solution is a home equity loan, whether it is a HELOC or fixed second rate mortgage. The home loan is secured by your most valuable property, your home. This results in an interest rate not much higher than a first mortgage. However, you have to be careful not to begin again spending more than you can afford. Then you’ll have more debt, and you can’t tap into your home equity to lower the interest rate.