10 dumb reasons to take out a loan
The Credit CARD Act that was enacted last month makes having a credit card a more transparent transaction that's supposed to protect consumers from the credit card companies -- despite the increased fees -- but it won't protect consumers from themselves and dumb spending habits.
Here are some of the dumbest reasons to get a loan, whether through a credit card, bank, 401k, payday advance, friend or any other way you can think of to borrow money:
Buying a timeshare.
It's one thing if you have $15,000 in cash burning a hole in your pocket and you want to throw it away on a timeshare vacation home, and can still afford monthly maintenance fees. But to borrow that money and pay interest on something that will likely turn upside down and be worth less than you paid is a bad idea. They're lousy investments that sellers are practically giving away, and borrowing money to buy one is throwing money away.
It's common to run out of money at the end of the month, but payday lenders are sharks that should be avoided at all costs. Better to get a low interest, low limit credit card and pay it off in full each month for such last-minute expenses while you wait for a paycheck.
Payday loan fees are usually a percentage of the amount borrowed or so much for every $100 borrowed, according to a GenXFinance.com story. Additional fees are piled on for rolling over the loan. Most lenders don't quote accurate interest rates, which range from 390% to 900% APR. A $45 fee on a $300 loan equates to 15% for two weeks, or about 30% per month, and 390% for a year. If things are so tight that you have to have a payday loan, ask your creditors for more time to pay your bills.
Unless you have a job lined up that will increase your income for enhancements made through plastic surgery, you'll likely regret taking out a loan for this. At least you will if you're the lender, as one man found out on "Judge Judy" when he loaned a woman money so she could have her breasts enlarged.
One reason cited for getting casino credit is that if the casino is in a bad neighborhood, you don't want to walk around with large sums of money in your pocket and are better off borrowing money from the casino to gamble and paying it back within a week if it's less than $1,000. If more, you'll get 14 days to pay it back, up to 45 days for $5,000 or more. But be careful: Casinos will automatically take the money owed out of your checking account if you don't send them the full amount by the due date.
There are also ATMs at casinos, but the high fees won't leave you with as much money to gamble with. Filling out a casino credit application is like filing for a credit card, although the casino requires the amount of money you're borrowing to be in a bank account it can link to. If you can't control you're gambling, this is a bad loan to get.
Unless you're retiring, borrowing money from a 401(k) retirement plan before age 59 1/2 will lead to some heavy fees that the federal government levies as a way to discourage people from using the money for anything except retirement. There are 401(k) loans and there are debit cards tied to accounts.
The money from this retirement account isn't taxed until withdrawn. There's a 10% early withdrawal penalty on top of being taxed on whatever amount is taken out. It will leave the 401(k) account with less money to invest and a big loss at compound interest, which could make you a millionaire with more money saved early. Taxes and penalty could put you in a new tax bracket and eat up half of your money. According to the website Own The Dollar, leaving a job before completely repaying a 401(k) loan is expensive. Borrowers have 60 days to repay the entire loan before the IRS considers it a regular withdraw and not a loan.
Going into debt so you could afford hosting the party of a lifetime isn't much of a way to start a marriage. Having a loan, whether for a wedding or any of the other ways outlined here, along with legitimate reasons such as a home loan, is something that will follow you for years unless it's paid off quickly.
As a couple, you'll be behind before getting started on a new life together. The debt will affect every decision you make together. Will you be able to afford new furniture or household emergencies that pop up if you're paying off a $30,000 loan with a photo album and memories to show for it?
Helping a friend.
If you loan money to a friend, you might as well consider it money gone and a gift. If you are paid back, consider yourself lucky for getting the money and avoiding that bad blood a loan gone sour can create between friends.
There are just so many things that can go wrong, especially if the money is loaned to a boyfriend or girlfriend. Without a written contract, you're screwed. And if you have a contract, such as for taking out a car loan for someone else, you're legally responsible for paying back the money. And what rights do you have to getting that money after a breakup? You'll probably need a lawyer, and don't expect that to be cheap.
Like weddings, taking out a loan to buy Christmas gifts is a dumb idea that shouldn't need much explanation. Christmas loans are easy to get, with all kinds of businesses eager for your money so you can look like the generous gift giver while going into debt and making your financial life hell.
Disappointing the kids on Christmas morning is something no one wants to do, but a loan isn't the way to pay for gifts. Take a look at your finances now and start keeping track of where your money goes. You may find, as one family did, that $2,300 a month in expenses can't be accounted for.
Buy a new car.
All of these expenses would be easier if you put money aside beforehand and don't have to get a loan to afford them. The same goes with a new car loan. Making a car payment for three or five years is painful not only for the monthly interest on the loan, but for the monthly reminder that you're paying for something that is falling in value every time you use it.
Halfway through the car loan your car could depreciate by 20%-40%, making the car less valuable than what's left on the loan. A new car smell is nice, but it won't last as long as the loan payments. You're better off putting the money in a savings account each month, years before you'll need to buy a car.
Buying stocks is always a gamble, although a better-educated one than going to a casino. But borrowing money from a broker or bank to enter the stock market is a bad decision unless you have money to lose. Broker fees will eat into your profits, and buying on margin through credit from a stock broker is too risky. You're better off buying stocks slowly and only with what you can afford -- meaning money you have in hand and not through a loan but by buying directly through the company you want to invest in.
Aaron Crowe is a freelance journalist in the San Francisco Bay Area.