Credit Cards
Credit cards can be a convenient way to pay for gas, clothing, or other items. They also can lead to increasing burdens of debt if not used and handled responsibly. If you are disciplined to charge only what you can afford and you always pay your bills for the amount due, on time, every month, a credit card can be a great convenience.
If you know you use credit correctly, look for the lowest interest rate you can find, no annual fee, and a grace period where interest isn’t charged as long as you pay by the due date. If you know you can’t trust yourself not to spend money you don’t have, it’s best to avoid using credit cards.
Car Loans
Taking out a loan to buy a car is one of the most common financial transactions many people experience. Because there is such a demand for automobile financing, the competition can lead to good deals for consumers.
Car loans from banks and manufacturers can be low risk. Some dealers can offer low-interest-rate loans through banks. The industry also can have unscrupulous dealers or loan companies offering extremely high interest rates to people with bad credit. If you’re careful and responsible, a car loan can be an example of “good debt” and an opportunity to build and improve your credit score.
Learn more about buying a car:
Retirement Loans
If you’ve been putting money into your employer’s retirement plan, usually a 401k, you may be tempted to tap into that account. While the money you’ve been setting aside is technically yours, many withdrawal rules and potential penalties apply because it is a retirement fund and not a checking or savings account.
Specifically, if you can’t pay back the loan in full and on time, you may have to pay penalties and taxes on the amount borrowed. You also run the risk of damaging — or entirely depleting — your retirement savings.
Avoid this type of loan or have a plan in place to pay off your loan in the event you lose or leave your job before the loan is repaid. Otherwise, you must pay back the entire remaining balance within a short period of time, such as 60 days, or you’ll face penalties and taxes.
Loans from Family and Friends
When it comes to personal loans, every situation is unique. Some family members may be able and willing to offer you a lower interest rate than you can get anywhere else.
Be careful when receiving money from friends and family. Be aware there may be unspoken expectations when you receive money; for example, they may think they have the right to tell you how to spend it. They may say you can have the money for as long as you need, but then they run into financial trouble and need you to repay them right away. It’s best for both parties to treat the loan the same way as if it was a loan from a bank. Agree to terms up front — interest rate, payment amounts, due dates, payoff date — as well as consequences if you fail to repay the loan. Sign and date your mutual agreement.
Often family conflict, broken relationships and lost friendships occur over these types of lending relationships.
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