5 Incredibly Stupid -- But Popular -- Ways To Borrow Money

By Miranda Marquit
September 17, 2013

I'm going to tell you something that flies in the face of what your Grandma told you: Debt isn't all bad.

I have mortgage debt. The interest rate is low, and the interest I pay is tax deductible.

That isn't to say all kinds of debt are good. But my mortgage allowed me to buy an asset (my house) when I otherwise wouldn't have been able to. A mortgage is a form of leverage that allows you to magnify the money you do have.

And according to our research, if there was ever a time to invest in real estate, it is now.

The perfect storm of rising home prices combined with an insatiable renter market has some of Wall Street's biggest firms salivating at the sheer profit potential. To put it bluntly, if you wait too long, you could miss out on a ton of potential profits from an opportunity that only comes along once every couple of decades. (Click here to find out more from our exclusive special report.)

The gains may not all be monetary, though. With a loan like a mortgage, there are emotional gains as well. I may not get a solid financial return on my investment, but I can't really put a price on the feelings of security and emotional well being that come with having a home for my family.

But not all loans provide the same benefits as a mortgage or a student loan or a business loan, and those you need to watch out for. Some loans are all take, with high interest rates and devastating emotional consequences.

Here are five of the worst loans you can get:

1. Payday Loans

While some states cap payday loan interest rates, others allow lenders to charge whatever they want. In some cases, the annual percentage rate (or APR) can end up at more than 1,000%! 

Payday loans are also notoriously easy to renew. Often, all you have to do is pay a seemingly small fee to extend the loan. Before you know it, you are stuck in the payday loan cycle, and the outrageous interest charged makes it hard to break free.

2. Car Title Loans

A car title loan usually has a lower interest rate than a payday loan. However, the APR is still going to be relatively high. On top of that, you secure a car title loan with your car. This means that if you run into more trouble and can't make payments, the lender can repossess your car.

How will you get to work and earn a living if you don't have transportation?

3. Pawnshop Loans

Pawnshop loans are another type of secured loan that can come with a hefty interest rate.

You agree to repay the loan within a certain amount of time, leaving a valuable item as collateral. If you don't return to pay off your debt, the pawnshop owner can sell your item, whether it's gold heirloom jewelry, your favorite gun or some other item of value. If there is sentimental value as well, this type of loan can be devastating.

4. Tax Refund Anticipation Loans

Have you seen the ads for "early" tax refunds?

When you are offered an "early" tax refund, you are actually being offered a loan. A tax preparer figures your taxes, and then offers you a loan based on your expected refund amount. You get money up front (usually only a portion of what your refund should be) and agree to let the tax preparer take the money from your refund.

The fees can be quite high for this type of loan. Plus, between e-file and direct deposit, it's possible to receive your refund in seven to 10 business days, so there's no reason for these types of loans in most cases.

5. Certain Secured Credit Cards

Make no mistake: A secured credit card is a type of loan. However, instead of granting you a line of credit without requiring you to put up collateral, a secured card usually requires that you put money in a specific account to act as security against a default.

The money in this account isn't used to make payments on your card, though. Some prepaid cards have high origination and setup fees, so a card with a $500 credit limit might start out with $300 already on the card from the fees, leaving you only $200 in available credit. Interest rates are usually quite high with secured credit cards, and you often have to deal with annual fees as well.

The Investing Answer: All of the worst loans come with high fees and interest. On top of that, they are often viewed negatively in credit scoring models. A payday loan can ding your credit in a way that a car loan doesn't. These types of loans should only be used as last resorts, when you can find no other source of funding and you truly need the liquidity.

P.S. -- As we mentioned earlier, a perfect storm has developed in the real estate market -- and we can show you how to profit from it. We'll tell you all about it in our new report, "How You Could Collect Up to 8.6% in 'Rental Income' By Investing Like the 1%." Click here to get it.