Loans

Going out on your own and being accountable for your own finances can be tough. Systems are in place to help you through difficult economic times or to make large purchases, such as cars or homes. Loans are a good way to build credit, but first you have to have credit. Before applying for a loan, keep the following in mind:

• Be aware of your personal credit.
• Research which loan is right for you.
• Determine collateral and make a pay-back plan.

Types of Loans

Open-ended

Loans that allow you to continuously borrow money, such as credit cards. In open-ended loans you are given a credit limit for purchases. With each purchase, you lose available credit. Once you make a payment, the credit becomes available again.

Closed-ended

Loans that can’t be reused. You are loaned a certain amount and required to make scheduled payments to decrease the amount owed. If you need to borrow more money, you have to apply for a new loan—the credit can’t be increased.

Secured

Loans that require collateral. Collateral is an asset offered in exchange for the loan. If you fail to repay your loan, the lender can take possession of the asset. For example, when you buy a house, your collateral is the home itself. If you fail to make your mortgage payments, the lender can foreclose on your home.

Unsecured

Loans that don’t require collateral. Loans are given based on credit history and income. In the event of nonpayment, the lender will contact debt collection agencies and lawyers to recover the money.

Conventional

Loans that aren’t overseen by a government agency. Mortgages are conventional loans given by a bank to purchase a home. These loans are long-term and entail fees, down payments, appraisals, and insurance.

Dangerous Loans

Emergencies come up and you may find yourself considering fast cash options. Be wary of “easy money” schemes that can carry high interest rates and penalty fees. Cash advance loans and payday loans are some of the most popular loans that can get you into trouble.

Payday loans are based on guaranteed repayment with your next paycheck. Usually you give the lender a postdated check (generally dated for your next payday), which includes the amount of the loan and a fee. The lender cashes the check on the agreed upon date. Cash advance loans are when you borrow cash against your credit card. Cash advance loans often have a higher interest rate than even the card itself. Failure to repay these loans may result in criminal prosecution. If you are in need of fast cash, first talk to a family member or your banking institution. If you decide on a payday loan, make sure you have a strict repayment plan.

Advanced-fee loans are scam loans. Advance-fee scams are the third leading fraudulent online scheme reported.¹ Typically a lender will offer you a loan and convince you to pay the initiation fee first to obtain the money. Once you wire the money, the lender disappears (disconnected number, returned email, abandoned website) with your money and provides no loan.

¹ Internet Crime Complaint Center. 2011 Internet Crime Report. Washington, D.C., 2011. Available: www.ic3.gov/media/annualreport/2011_IC3Report.pdf.