New Year, New Credit: Five loans to Avoid in 2012

2012 is fast-approaching, and it’s time for resolutions. If your finances were less-than-stellar this year, credit repair should be at the top of your list. While debt reduction and money management are great ways to stay ahead of the curve, avoiding potential trouble is critical as well. For that reason, borrowing money is both the easiest and most daunting way to land yourself deeper in debt. If you do find yourself entering the New Year on a tight budget, reconsider applying for the following types of loans before signing on the dotted line. Their consequences could halt your credit repair resolutions before they’ve begun. Avoid:

  1. Tax refund loans.
  2. The New Year means tax refund time—a much-needed source of funds for millions of people. While April 15 may seem like a lifetime away, cashing in on your refund in the form of a Refund Anticipation Loan (RAL) is premature. Many tax preparers offer to pay their clients refund money before receiving it from the government. While you may think this is a simple and convenient cash advance, think again. The same preparer will likely charge fees and interest on top of the loan amount, reducing your overall refund. Hold out for Uncle Sam’s check instead of looking for an advance. It’ll save you money in the long run.


  3. Payday loans.
  4. A difficult month can be stressful for any family, especially if you cannot pay all your bills. When faced with dwindling bank accounts, many seek help from companies that offer payday loans, or cash advances on your next paycheck. The company asks you to write a check for the amount you’d like to borrow plus an additional interest fee to cover their service. You get your money while they wait to cash your check until after your next payday. Although this may be a temporary solution, forking over the extra cash for the service will do nothing to help your financial standing, especially if you’re fiscally strapped. Consider other optionsbefore seeking this kind of outside help.


  5. Pawn shop loans.
  6. When foraging for cash, don’t think about trading in your grandmother’s wedding ring or a valuable set of baseball cards. Sure, pawn shops will take your goods and give you cash, but they will also charge you interest if you come back to reclaim them. Heirlooms are often precious investments—don’t sacrifice your family inheritance on a whim.


  7. Rent-to-own furniture.
  8. While some rent-to-own agreements can do wonders for your credit repair efforts, this option comes with risks. For example, Morris furnished his home using a rent-to-own company. Unfortunately, winter weather has left him without a construction job for the past two months. Unable to pay, the company repossessed all his furniture. Now Morris is left with an empty bank account, damaged credit, and no sofa. Read the fine print before getting involved with rent-to-own deals. Non-payment often means repossession, regardless of how much you have already invested.


  9. Overdraft loans.
  10. Overdraft banking coverage is always better than bouncing a check, right? Maybe, but the average $30 fee will take a toll on your bank account if overspending is a habit. Keep your overdraft coverage in place while checking your balances before a shopping spree. A little forethought will prevent you from losing money unnecessarily.