Banks generally offer lower interest rates than alternative lenders. However, many have strict lending requirements that leave some borrowers without traditional loan options. Thus, there is a market for alternative loans, as borrowers have to get money from somewhere.
Alternative loans include car title loans, payday loans and personal loans from friends and family. Let’s compare these types of loans.
When shopping around for a loan, it may seem best to go with a loan from a friend or family member. If you have someone that you fully trust that is willing to lend you money, this may just be the way to go. Still, this is a risky venture for several reasons.
First, consider what will happen if your friend or family member refuses your offer. Will this person be offended that you even asked? Will you be upset that he or she won’t give you a loan?
Second, consider what will happen if either you or the lender fails to meet a provision of your agreement. For example, what if your friend decides to back out of part or all of the loan. Will your friendship be strained?
Doing business with family and close friends can be very beneficial, but it also can damage or ruin a relationship. With this in mind, it may only be best to seek a loan from a friend or family member if there is an unbreakable trust.
Note that with a pawn loan, you’ll have to transport an item to the pawn shop. This could be a hassle if you are pawning a large item.
Payday loans and car title loans typically just require documents, making them among the most practical to obtain of the various types of alternative loans.
Interest rates on loans from family and friends will almost always be lower than those on other alternative loans. However, keep in mind that you will risk your entire relationship with such a person.
Interest rates on payday loans are very high. To illustrate this, the typical annual interest rate on payday loans in Missouri is 445 percent.
On pawn loans, the rates are a bit lower. For example, Texas law allows for a maximum of 240 percent in annual interest charges.
Car title loans are in the middle with an average annual interest rate of approximately 300 percent.
Note that you’ll find a wide range of interest rates for all of the mentioned loan types, so you can get a much lower rate that mentioned by shopping around. For example, some car title lenders offer rates at half of the mentioned interest rate, which would save you a lot of money when compared to average lenders.
Any type of loan carries risks.
With a loan from a friend or family member, you will risk damaging the relationship. Also, if you do not pay the loan back properly, the issue could ultimately end up in court.
With a payday loan, you also run the risk of being taken to court. If a judgment is awarded in favor of the lender, you could end up having your wages garnished, a lien against your assets or some other type of problematic financial situation. Borrowers of such loans default 10 to 20 percent of the time.
Pawn loans involve the risk of total loss of the relevant asset. For example, if you pawn your television and do not pay the loan back, the pawn shop will keep it and eventually sell it. Approximately 20 percent of pawned items are not returned, based on information from the National Pawnbrokers Association.
Car title loans involve a risk to the borrower’s vehicle. If the loan is not repaid, the vehicle may be repossessed. This happens 4 to 8 percent of the time, making such loans less risky than payday loans and pawn loans.
Of the various types of alternative loans, a personal loan from a friend or family member will usually be the cheapest. However, this method of borrowing can be very awkward and strain a relationship.
As for the other mentioned loan types, payday loans and car title loans usually require the least effort to obtain. Car title loans usually have lower interest rates, giving them an edge over payday loans.
Whichever loan type you choose, be sure to pay it off on time. By doing so, you’ll borrow the money you need without any problems on the back end.
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