The news has been full of sad stories about families suffering from financial problems. Many people who are in debt have found themselves in this position for reasons beyond their control. Unfortunately, they've had to rely on credit to survive. Their problems are often compounded because when people are vulnerable, they tend to make foolish mistakes. Here are five common ones that you can avoid:
1. Signing up for payday loans. Please do not get a payday loan. These places charge an enormous amount of interest and fees. Most customers who get these loans have a lot of trouble paying them off, often paying through their nose in interest and extra charges. This is because payday loans are typically targeted at lower-income families.
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If you do need money, you'd actually be better of pawning items or getting a high interest credit card. But why get a high interest card when there are low interest rate credit cards that abound? You may qualify if you've got good enough credit.
2. Co-signing a loan for a significant other. How many times have you heard someone say, “It wasn’t my loan, it was my ex-boyfriend’s. I just cosigned for him.” Unfortunately, the moment you cosign for someone, you become liable. Whether you like it or not, your signature is saying, "I will pay this bill, if he or she does not." Co-signing for someone can be risky business, especially if your relationship with this person is temporary.
It's often the case that when a relationship is terminated and a person in a cosign agreement stops paying, the other cosigner is left holding the bag with ruined credit. Want to avoid a financial catastrophe? Then don't cosign for a friend or significant other. You may even want to extend this rule to family members as well.
3. Borrowing money from family. Getting a loan from a relative won't necessarily cost you more money, but it may potentially cost you a close relationship with someone you love. When you borrow money from a family member, the relationship dynamic changes from father/daughter or sister/brother to borrower/lender.
Once you get that loan, imagine what happens whenever you spend money. Your lender may start keeping an eye on your spending patterns, which can very well become annoying or frustrating for the both of you. Before long, you'll begin avoiding your family if you find yourself having a tough time paying them back. It's easy to abuse this relationship because a close relative often affords you a lot more flexibility and less accountability for your actions, so you tend to give this type of loan a lower priority in the grand scheme of things. Eventually, your relationship will suffer as you feel guilty while your lender feels resentful -- not a good ending. Borrowing from family is just a bad idea. Instead, get a personal loan from your bank or a peer-to-peer lender such as Lending Club. If you're really in a bind, you may want to think about using your credit card for emergencies.
4. Rent-to-own. Most rent-to-own establishments prey on low-income customers who are unable to save enough ahead of time to afford the large purchases they want to make. Rent-to-own arrangements typically charge an enormous amount of interest on payments. When the deal is done, and you've finally paid off the furniture, appliances or electronics, your outlay will be quite a lot more than the original prices of the items you've bought. In addition, by the time you've finished paying for it, your purchase would already have depreciated in value.
Unfortunately, in desperate situations, people turn to rent-to-own establishments. But you don't need to fall into this spending trap. Instead, try to defer your purchases until you can afford them. Be proactive, look into high yield savings accounts and start your own savings fund for the items you plan to buy someday.
5. Playing the lottery. If you've got no debt and you’ve got all your investments and retirement accounts fully funded, you might be tempted to throw money away. If so, then please go ahead and play the lottery. Just know that you are more likely to be struck by lightning than to win the lottery. If banking on a big win is your retirement plan, then it may be time to rethink that plan. Playing the lottery should be considered a form of entertainment. It is not an investment or a great plan for retirement.
Silicon Valley Blogger is a full time blogger and online entrepreneur who writes for The Digerati Life and The Smarter Wallet sites that cover general personal finance topics ranging from investing and saving to credit and debt management.