Is compound interest hurting or helping you?
As an avid saver or individual investor, compound interest is your friend. When you put money away in savings or make an investment, you begin to earn compound interest.
Left untouched, the compounding interest will grow exponentially over time. Use a savings account with an interest rate of 5% or more, wait a few years, and make hundreds, or even thousands, of dollars in interest!
However, there’s an ugly side of compound interest too. If you start using the wrong types of loans, the interest charges will grow faster than you can pay off the funds. Before you know it, you’ll be deep in debt and far away from financial freedom.
What type of loans are safe to take out, and which ones should you steer clear of? Read on to learn about a few of the most common loans around.
1. Getting a Car Loan
Are you trying to get extra money to buy a car? Then it would help if you looked for a loan made explicitly for purchasing a vehicle.
You might not qualify for a reasonable interest rate if you apply for an auto loan before fixing your credit report. To get a car loan with a favorable interest rate, you’ll first need to check your credit report. If there’s any false information on your credit report, you’ll want to take immediate action.
Next, make sure you apply for auto loans from multiple lenders. You can apply for auto loans from online lenders, big national banks, dealer financing, and local credit unions.
The more applications you’re exploring, the easier it’ll be for you to find the perfect interest rate. When getting rate quotes, find out exactly how much you are qualified to borrow and at what interest rate.
2. Small Business Loan
Are you in a unique position where you’re ready to start your own company? Perhaps you’ve built up residual income over time, and you need to add to it. A business loan is a great way to grow your dream company, but restrictions on lending standards can make things tricky.
Again, you’ll need to check your credit score before applying for any loans. Next, you’ll need to determine what type of payments you’ll be able to afford.
Do you know how your company’s cash flow will operate? It would help if you had your other business expenses nailed down before you started applying for loans.
If you’re already in business, proving how much money your company brings in will help you qualify for short-term business loans. If you’re not in business, prepare to offer something valuable as collateral for the loan.
Once you have your collateral set, you can explore startup financing options. In some cases, you’ll be able to secure financing without collateral, even if you’re new to the business world.
Opportunities such as unsecured personal loans or business credit cards don’t require collateral. Unsecured means that you haven’t done any kind of collateral.
Collateral is an item of value that you, the lender, offer to secure your loan. The lending institution can take the collateral if you don’t pay your loan.
3. How Does the Title Loan Work?
Are you looking for the types of loans that pay out immediately? When you need cash fast, a title loan can be the perfect solution. You can secure title loans with no job history. Instead, you’ll need the pink slip for your automobile.
By putting your car on the line, you’ll be able to get money right away. The downside to title loans is that they have astronomically high-interest rates that can reach 300% or more.
If you borrow $1,000, you’ll have to repay the $1,000, Plus close to an additional $300. If you’re stuck in a position where you either have to get a payday loan or a title loan, a title loan will probably be the preferred choice. Payday loans have even higher interest rates and usually don’t provide as much cash up front.
4. Credit Card Loans
Since credit cards don’t require any collateral, you can get immediate funding without putting anything on the line. For the best credit card deals, it helps if you have a healthy credit score.
When you have a healthy credit score, it’s easier to qualify for cards that have preferred rates. If you have a below-average credit score, your interest rates are probably going to be high. However, that doesn’t mean you should avoid credit cards altogether.
Strategically using credit cards can help you fix your credit score as you build borrowing power over time. We suggest reaching out to your banking institution and asking them to refer you to a credit card company that will work with your finances.
Often, banking institutions will have free financial advisors who can walk you through all of your options and give you the best tips for fixing your credit.
5. Payday Loan
When an emergency strikes, a payday loan can help save the day. Payday loans are notorious for having high finance charges, steep interest rates of 400% or more, and short repayment times. These loans are not a first-choice option but can help when you’re in a pinch.
Once you’re approved for a Payday loan, you can request to have the money deposited directly into your bank account. If your bank account is overdrawn, or you don’t want to use it, you can request to get the loan in cash.
You’ll usually have 14 days to repay the payday loan. However, if your company uses a weekly pay schedule, you’ll only have one week to repay the funds.
Not only are payday loans costly, but they’re also dangerous. If you don’t have the money now, how are you going to have it next week? This is the type of question you need to consider before jumping into what appears to be a solution.
Explore the Different Types of Loans
After reading about the different types of loans, what one do you think will work the best for you? Will you be exploring dealership financing to help fund your new car? Or perhaps you’re going to rebuild your credit with a strategic credit card loan.
Take your time and thoroughly explore all of your loan options, along with their varied interest rates.
If you have a banking institution, ask to talk to a financial advisor to get their opinions on loans. We’d also love to share more tips with you; read another one of our articles.