Consumer Financial Education: Other Loans
Apart from mortgage loans and student loans, there are numerous other avenues that financial services providers will loan you money for any number of purposes.
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They all basically boil down to borrowing a sum of money from some entity (a bank, credit union, payday lender, individual, etc.) in exchange for future repayment of the value or principal amount. In most cases, the lender also adds interest and/or finance charges to the principal value which the borrower must repay in addition to the principal balance. Loans come in many different forms including secured, unsecured, commercial, and personal loans. We’re going to look at a few of the most common loans here.
Payday Loans
A payday loan is a short-term, high-cost loan. To take out a payday loan, you typically write a post-dated check to the loan servicer for the full amount of the loan, then repay it or have the funds deducted from your account on your next payday, up to 31 days later. For example, if you wrote the loan servicer a $300 check, pay a $45 fee, then you would receive $255 in cash.
If you do decide to take out a payday loan, you should borrow only as much as you can pay back in full on your next payday, and consider alternate forms of credit first. If you cannot afford to pay back the loan on the due date, do not take out a second payday loan to cover the cost. Doing so can lead to a cycle of debt which will be expensive and difficult to recover from.
The fees and interest associated with payday loans can be steep, so you should be aware of the fees allowed for such loans before you enter into any agreement. California law does offer some guardrails for payday loans:
- Maximum amount: $300
- Maximum fee: 15% of loan amount (up to a maximum of $45)
15% may not sound like a lot, but it is equivalent to an annual percentage rate (APR) of 460% for a two-week loan. By comparison, a loan for a new car generally has an APR between 4% and 7%. APR is the total annual interest and any additional costs or fees that a borrower pays on a loan. APR is used to reveal the total cost of borrowing money.
For additional information, visit the DFPI What you need to know about Payday Loans brochure.
Auto Loans
Auto loans are used to purchase a car, and are available from a variety of loan sources, type of loan, loan term length, and interest rate. Making a monthly car payment is a major commitment, but for many people it’s the only option- — 85% of new car buyers and 37.5% of those buying used, finance the purchase.
While considering the monthly financial commitment, keep in mind that when you shop for a car, you’re also shopping for financing. In fact, you likely should shop for financing you can afford, then find a car that fits the bill.
Title Loans
A car title loan is a loan for a small amount of money and for a short time.
To get a car title loan, you give the lender the title to your vehicle – for example, your car, truck or motorcycle. You also pay the lender a fee to borrow the money. You usually have to repay the loan in 30 days. Car title loans can be very expensive. If you cannot repay the money you owe, the lender can take your vehicle.
You should look into other types of loans before considering this option.
Personal Loans
One of the most attractive things about personal loans is they can be used for any reason. Personal loans may be an option for people with credit card debt and want to reduce their interest rate by transferring balances. Like other loans, the interest rate and loan terms depend on your credit history and financial situation. The term of a personal loan is generally between 12-60 months, the amount can be as little as $1,000 to as much as $100,000 or more, and the APR interest may range from 6% – 36%. It is important to consider multiple lenders and negotiate the best terms for your situation. Some of the most common types of personal loans are:
- Debt-consolidation Loan: Used to consolidate several debts into one, ideally with a lower interest rate.
- Home Equity Personal Loan: Lump-sum loan secured by your equity in your home.
- Short-term Personal Loan: Taken when funds are needed urgently.
- No Credit/Bad Credit Personal Loan: For consumers with a bad or limited credit history.
- Second-chance Personal Loan: For a financial crisis or personal tragedy.
Further resources:
- Payday loan guidance: https://www.consumerfinance.gov/consumer-tools/payday-loans/
- Getting out of debt resources: https://www.consumer.ftc.gov/articles/getting-out-debt
LEGAL DISCLAIMER
The content on this page provides general consumer information. It is not legal advice or regulatory guidance. The DFPI updates this information periodically. This information may include links or references to third-party resources or content. We do not endorse the third-party or guarantee the accuracy of this third-party information. There may be additional resources that also serve your needs.