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Know what to look for when getting a loan

It is important to have a good credit history so you can qualify for a loan when you need it. But some types of loans create more problems than they solve.

Why should I avoid payday loans? Some stores give you small cash advances if you write them a check from your checking account. The store holds your check until your next payday and then cashes it.

However, for a two-week payday advance, you will typically pay $15 for every $100 you borrow. If you borrow often or cannot pay off these advances, you could owe many times more in fees than you actually borrow.

There is an alternative! Credit unions or banks may offer small, short-term loans to their customers at reasonable rates. A community group might help you find other solutions.

Is Rent-to-Own a good deal? Rent-to-own offers may sound good, but they can be terrible traps. Typically, in rent-to-own situations, you will pay two- to five- times more than the cost of the same item at a discount store.

A rent-to-own TV may cost $9.99 per week for 78 weeks. So the renter ends up paying $779 for a TV priced at $196 in the store.

If you miss a payment, you could lose the item and all of the money you already paid towards owning it.

There is an alternative! Save your money to buy what you need, pay for an expensive item in three or four installments, or take out a small, short-term loan.

What home loans should I avoid?

High points and fees. Points and fees should not total more than three percent of your amount or four percent for FHA or VA loans.

High interest rates. It is easy to verify current mortgage rates by looking in a Sunday paper or asking at the bank or credit union. Don't pay more than the going rate.

"Balloon payments." Do not agree to a loan where, after several years of manageable monthly payments, you have to repay the remainder of the loan in one large "balloon payment." If you can't afford the last payment, you could lose the house.

Home equity loans. Offers to consolidate your debt in a home equity loan may save you money in the short run, but you could end up losing your house if you can't make your payments.

Prepayment penalties are high and unnecessary fees charged for paying off your loan. They prevent you from refinancing or selling your home.

You don't need to buy credit life or disability insurance. Never pay insurance fees upfront or allow the fees to be added into your loan.

Web posted on Thursday, August 19, 2010

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