The Lowdown on Loans

Willie Grace | 2/4/2015, 1:53 p.m. | Updated on 2/4/2015, 1:53 p.m.
"When faced with a financial emergency, most people don't think through how borrowing money might affect them down the line," ...
The Lowdown on Loans

(Family Features) Borrowing money can help you manage your way out of a tight spot, but doing so without knowing all the facts can make your finances even tighter in the long run.

"When faced with a financial emergency, most people don't think through how borrowing money might affect them down the line," said Susie Irvine, president and CEO, American Financial Services Association Education Foundation. "With so many options available, it's relatively easy to get a loan, but the impact on your credit and what it actually costs you over time can vary a great deal."

Two common forms of small-dollar borrowing are traditional installment loans (TIL) and payday loans. Understanding how each loan works can help you make the right decision for your financial situation.

Traditional installment loans are used for various purposes, such as meeting family emergencies, purchasing home furnishings or consolidating other debts. These loans are generally short-term. Most traditional installment loans range from $500 to $3,500, with the borrower paying equal installments at regular intervals over a determined number of weeks, months or years. A typical monthly payment is around $125. With regular, manageable payments of principal and interest, the borrower has a clear roadmap out of debt.

Payday loans are repaid in a single balloon payment at the end of the loan period. This payment is usually due in less than 30 days, most commonly 14 days. Payday lenders do not assess ability to repay, relying instead on a postdated check or on similar access to a borrower's bank account as their assurance that the loan will be repaid. Although payday loans may appear to provide a quick and easy solution, a traditional installment loan is a more financially sound choice for most people.

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Is an Installment Loan Right for Me?

When deciding whether to obtain an installment loan, consider the benefits and responsibilities. According to the American Financial Services Association Education Foundation, an installment loan:

  • Obligates future income. You'll be required to set aside a certain amount of future income for loan payments.

  • Requires discipline. Borrowing wisely means not borrowing more than you can handle. Don't let the thrill of buying or having a sum of cash obligate you to more than you can afford.

  • Makes it possible to meet unexpected expenses. The ability to borrow and make affordable payments can be helpful if an emergency arises that requires extra money.

  • Allows you to obtain products and services now and pay for them later. A loan can provide an opportunity to purchase bigger-ticket items and use them right away.

Keys to Credit Success

The American Financial Services Association Education Foundation offers this advice to help ensure that your interests are protected when you borrow money:

Budget your money. Provide your monthly spending plan when you meet with creditors. It will help them make a responsible decision about the amount of credit you can afford.

Shop, shop, shop. Compare the costs of credit from different creditors. Shop for credit like you would shop for anything else.