Five Types of Loans to Avoid

It’s wise to start our debt-free, financial discipleship journey by committing to always avoid these types of loans: 

  1. Finance company loans: Their interest rates are sky-high, and they often charge enormous fees and closing costs. Always pay attention to the difference between the interest rate offered and the annual percentage rate (APR), which includes these fees and closing costs.
  1. Payday loans: These are very short-term loans usually $100–500 secured by your paycheck. The Federal Trade Commission warns that the typical APR on payday loans is 390%! 

Imagine borrowing $300 for two months and then owing almost $500. It’s a legal form of robbery! Sadly, 91% of their business comes from people desperate enough to make five or more of these loans per year.

  1. Pawn shop loans: These are short-term loans based on the value of the item, which you would forfeit if the loan isn’t paid on time. 

Interest rates generally range from 5–25% percent per month, depending on the laws of the state, according to Credit Karma. Many people who take out pawn-shop loans never get back the property they pawned for cash. 

  1. Auto title loans: These are usually 30-day loans secured by your car title. An individual can borrow cash based on the value of the car. The high interest rates are not the biggest downside of a title loan, however. 

If the borrower fails to make the loan payment on time, the lender can repossess the vehicle. A member of nonprofit advocate Consumer Federation of America said, “Car title loans are really legalized car theft, because you lose the entire car equity no matter what the loan amount is.” 

  1. Tax-refund loans: This quick-fix loan is related to your tax refund. Millions of people look forward to April each year, because they’re getting a tax refund. Some are so cash-strapped, they get a tax-refund loan instead. 

Many tax preparers offer this service for a fee. What they neglect to tell their clients is that the interest rate can run well into the triple figures on an annualized basis.  

To learn more to help free yourself from debt, go to compass1.org/online-small-groups-studies/ and sign up for Building Your Finances God’s Way.

It’s special for our nation to celebrate our freedoms on Independence Day! It’s also special for us as individuals to work toward celebrating our own day of Freedom—from DEBT! 

In Love,

Howard Dayton

Founder

AUTHOR BIO

Howard is the founder of Compass—finances God’s way and author of five books and six small group studies. He graduated from Cornell University and served two and a half years as a naval officer. But after a business partner challenged him to study the Bible to discover what God teaches about handling money, Howard’s life was profoundly changed. Since beginning in ministry, he has served as a full-time volunteer and has led more than 75 small groups. Howard married Beverly in 1971, and had two children and four grandchildren before she went Home to be with the Lord. In 2019, Howard remarried. He and his wife, Lynn, reside in Central Florida and Charleston, South Carolina.

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