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The Four Types of Debt You Should Never Take On if You Can Help It



Debt can be a slippery slope. Some types (like mortgages) are healthy and improve your ability to do and buy the good things in life. Others (like, um, that sofa you’re still paying off) should come with a “danger” warning before you sign on the dotted line. Here, four types of debt that could spell disaster if you’re not careful.

1. Credit Card Debt

The average amount of credit card debt for families who carry a balance is $9,333, according to Value Penguin. Even more staggering is the fact that the average credit card interest rate is 14.58 percent for existing customers. (It’s 17.98 percent for new offers.) Here’s the rub: Credit card debt makes it almost impossible to build wealth because, no matter how much you pay off each month, if you’re not covering your balance in full, the interest charges alone are enough to cut any progress in half.

Yes, there’s the allure of strategizing around points and cash back. But the minute you start carrying a balance, any potential for financial gains goes out the window. (Just look at the section of your statement each month to get a sense of how your interest payments add up, especially if you only make the minimum payment.)

2. Payday Loans

If you’re living paycheck to paycheck, payday loans can seem appealing, given that they basically allow you to get cash immediately. But this type of loan is another form of debt that can get you into hot water fast.

For one thing, you’re going to want to read the fine print. There’s a hefty interest rate assessed on the date payment comes due and if you can’t meet that date, the interest rate goes up…and up. In fact, the average payday loan comes with fees ranging from 10 to 30 percent on every $100 they loan you…and that’s only if you pay it back on time, according to Dave In addition, payday loans aren’t something you can escape or easily punt down the road. When you take one out, in most cases, you’re giving the lender direct access to your checking account, which means they’ll be recouping the funds, whether you can afford it or not.

An alternative if you’re strapped for cash? Consider setting up a lending circle with friends, where each participant contributes a set amount of money each month with the “pot” going to one person on a rotating basis to help the party most in need. (There are even sites that help you automate it as a way to build better credit.) But you could also approach a credit union about a “payday alternative loan,” which comes with higher-than-typical interest, but is granted to those with bad credit and generally has a more flexible repayment plan. One more option: Negotiate with the person you owe money to. COVID has presented a world-wide crisis, which has put the pressure on for institutions—think medical offices, banks, whoever issued your car loan—to be a bit more flexible. Bottom line: It never hurts to ask.

3. Rent-to-Own Plans

A rent-to-own plan is an agreement that allows you to pay for something—most commonly consumer goods, but also property—in installments with the option to purchase at some point in the future. But, as tempting it is to walk out of a store with something you couldn’t afford (like that washing machine you had to have) it’s really not a sound financial move, and could end up costing you more long-term. Often, rent-to-own agreements leave you paying monthly installments that amount to more than the cost of the item if you were to pay for it in full up-front. There also tend to be hefty fees assessed on late payments, no protection or financial help with repairs and a number of hidden or added costs you might not notice right off the bat.

A better bet? Stick to items within your budget. Or buy second hand—there’s so much cute stuff out there, and it’s better for the environment.

4. Personal Loans

Before you consider a personal loan, think about your reasons for taking one out. If you’re aiming to get yourself out from underneath a mountain of credit card debt and can consolidate your cards into one lower monthly payment, this type of loan may be advantageous. But if you’re doing it to pay for something you can’t currently afford—say, a new TV or the cost of a wedding venue—think again. The interest rates may not be as high as a credit card’s, but they’re not far off. (Also, beware if you have bad credit — interest rates tend to be higher based on your score.) Even worse, personal loans come with processing fees and a non-negotiable fixed monthly payment. If you miss a cycle or fall short, the repercussions could include a lawsuit. Not worth it.

RELATED: Avalanche, Landslide or Snowball: Which Method Is Best for Paying Off Your Credit Card Debt?

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Bad Credit

Learn to avoid these credit card habits before you regret making costly mistakes



Picture used for illustrative purposes only. Many still decide to confront bad credit card habits only after they are thousands of dirhams in debt.
Image Credit: Reuters

Dubai: Many still decide to confront bad credit card habits only after they are thousands of dirhams in debt. Here we discuss some lessons many regretted not learning before making mistakes that proved costly.

Although credit cards offer convenience, security, and rewards, overspending with a credit card and the interest and fees can bury you financially. So it’s important to know whether you possess such habits in the first place.

Four questions to ask yourself first

If you don’t know whether you have a bad credit card habit here are four questions to ask yourself to find out. If the answer to any of the below is yes, you are inching towards a credit card debtpile.

1. Do you pay only interest fees or minimum payments when you send in your credit card payment?

2. Have you ever paid your credit card late because you didn’t have the money for the payment?

3. Do you use your credit card when you don’t have enough cash?

4. When your issuer raises your credit limit, do you spend more because you can?

Bad credit card habits

While common mistakes include habitually paying your credit card late and taking out costly cash advances on your credit card, here are some uncommon-yet-dire mistakes that may slip under any user’s radar.

Habit #1: Missing out unauthorised or fraudulent charges

Keep in mind that one of the main benefits to reading your credit card statement is, it is one of the best ways to catch unauthorised charges and billing errors.

Don’t check your credit card statement for your balance and payment information, review the entire statement to verify your account activity.

By routinely checking your online or physical statement, you can also find out well before hand if your credit limit was lowered since you last checked – as it can change because of your credit habits or your credit history.

Habit #2: Paying only the minimum can cost you dearly

It is evidently easier to make the minimum payment and this is a habit credit card companies profit from as well.

Although paying just the minimum is more convenient than to figure how much extra you can pay towards your outstanding credit card bill, keep in mind that when you’re making only the minimum payment, you’re not making much progress toward paying off your credit card bill.

Moreover, unless you have a very low balance or a zero per cent interest promotion, you’re probably paying much more in finance charges than you have to.

Habit #3: Using your credit card more than your debit card

While it’s recommended you use your credit card to amass cashback rewards or points and also pay off your credit card balance every month, you shouldn’t opt to use your credit card over your debit card, if those aren’t the reasons why you would go about using them.

Your debit card is your direct access to the funds you should use for everyday purchases, like groceries, gas, clothing, and other expenses. If you use your credit card, it should be a decision with a plan for paying off what you’re charging on the card.

Habit #4: If you are transferring balances just to avoid payments

Although promotions like balance transfers are a widely recommended strategy to pay off a high-interest rate balance on your credit card, matter experts reveal that if you’re in the habit of pursuing such promotions to avoid paying payments on your credit card, this leads to amassing long-term debts.

Financial planners reiterate that many don’t realise that balance transfers typically have fees that will increase your overall balance if you’re never making payments toward the transfer. Moreover, if you’re making purchases on the card with such a promotion, the problem gets bigger.

Expert tips to take control of these credit card habits

Lesson #1: Pay your credit card in full each month

The best way to keep your credit utilisation ratio low and avoid costly interest charges is to pay your credit card balance in full each month – which also means you also don’t incur any large due.

It’s effective to control spending by not spending more than you can comfortably pay down each month, as this helps you reduce the likelihood of developing long-running credit card debt.

If you want to take in one step further, setting a monthly spending limit that’s well within your budget increases the chances that you’ll actually be able to zero out your monthly balance and avoid interest charges.

Lesson #2: Keep your credit utilisation ratio low

What it means by ‘credit utilisation ratio’ is essentially the link between your credit card balances and your aggregate spending limit. For example, a Dh2,000 balance on a credit card with a Dh5,000 credit limit equates to a 40 per cent credit utilisation ratio.

As a rule of thumb, your credit utilisation ratio shouldn’t exceed 40 per cent, and keep in mind that high ratios may adversely impact your credit score.

Financial advisors recommend aiming for a 30 per cent credit utilisation ratio, as that gives you some leeway to cover urgent one-off expenses, which can come unexpectedly as a result of maybe losing your job during the ongoing pandemic.

Lesson #3: Setting up customised spending alerts

If controlling your credit card spending is burdening you, it has been widely advised to set up customised spending alerts.

This will let you know when you’ve made an abnormally large payment or exceed a certain balance threshold and you also can pair these data alerts with security alerts to help flag any sham spending patterns.

Lesson #4: Using credit card rewards and points to your advantage

If you have a rewards credit card, you can use it to your advantage. If you have a pure cash back credit card, use any cash rewards you receive to put toward your account balance or directly deposit it into your savings account.

Alternatively, if you have a rewards points credit card, you can use your rewards to buy discounted gift cards to the stores you know, which will help save on future purchases without having to use your credit card.

If not, you could always redeem your reward points for cash redemption to put into savings or towards your account. However, ensure you know when your rewards expire to get the most out of them financially.

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When Can I Get an Auto Loan After a Repo?



There’s nothing saying you can’t apply for an auto loan immediately after a repo, but the tough part is actually being able to qualify for the loan. Since many auto lenders don’t approve borrowers with a repo that’s less than a year old, you may have to consider in-house financing.

Repossessions and Your Next Car Loan

Unfortunately, most traditional auto lenders don’t work with borrowers that have a recent repo on their credit reports. When we say traditional, we’re referring to lending institutions such as banks, credit unions, online lenders, and the captive lenders of some automakers. These lenders often require a good credit score and clean credit reports.

Where does that leave you? Well, likely in-house financing is the next logical step if you need a car loan after a repossession.

More on In-House Financing

Buy here pay here (BHPH) dealerships use in-house financing. This way of auto financing involves working with the dealer who’s also your lender. There’s no need to find a third-party lender or preapproval – the dealer takes care of all that. This setup can be convenient, and often, borrowers are able to walk away with a vehicle the same day they first set foot on the lot.

Since these dealers may not check your credit reports to determine your eligibility for auto financing, your recent repossession generally isn’t an issue. If you can meet income requirements, prove you have stable work, secure auto insurance, and prove your identity, you might get into a vehicle after a repo with in-house financing.

Here are a few more details on in-house financing:

  • Used cars only – BHPH dealers only offer used vehicles. However, used cars are a good option for bad credit borrowers. They’re almost always less expensive than a brand-new car, and affordable is a good price when you need to get back on your feet after a repo.
  • Anticipate a higher interest rate – Without a credit check, lenders are taking a risk approving a car loan without knowing much about your credit history. To make up for this, they tend to assign higher interest rates. A high interest rate may be considered a good trade-off for an auto loan with bad credit in many cases, especially if you heavily rely on a vehicle to get by.
  • Credit repair may not be an option – If you get an auto loan with a lender that doesn’t check your credit, it’s a possibility that your on-time payments aren’t going to be reported to the credit bureaus. If you want to repair your credit with a car loan, ask the lender about their credit reporting practices before you sign on the dotted line.
  • Down payments are required – Few things are certain in the auto lending world, but one thing you can count on is needing a down payment if your credit is less than perfect. BHPH dealers often require a down payment of up to 20% of the vehicle’s selling price.
  • Prepare your documents – While a BHPH dealer may not check your credit, they’re likely to ask about your income and possibly your work history. You need proof of income to qualify for a car loan, no matter what lender you work with, so prepare at least a month of computer-generated check stubs. If you don’t have W-2 income, have copies of your last two to three years of tax returns.

Looking Forward After a Repo

When Can I Get a Car After a Repo?After one year, your auto loan options open up a little bit more and you’re more likely to qualify for a subprime car loan. Subprime lenders are equipped to assist bad credit borrowers. These lenders offer you a chance for credit repair because they report their loans and work with poor credit borrowers.

If you need a vehicle quickly, a BHPH dealership could be your first step in getting back on the road. Once some time has passed, and your repossession loses some impact on your credit reports, you can try for an auto loan that has the potential to repair your credit.

Here at Auto Credit Express, we know a thing or two about bad credit auto loans, and we have a nationwide network of dealerships that assist bad credit borrowers. We aim to match consumers to dealers in their local area that help with credit challenges. If you’re in need of auto financing, start right now by filling out our free auto loan request form. We’ll look for a dealer in your local area at no cost and with no obligation.

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Pros and Cons of Subprime Lenders and Loans



A subprime loan is primarily a type of loan offered to borrowers that don’t qualify for conventional loans and are considered high risk due to various factors such as low income, significant outstanding debt, and low credit score.

These loans can also be called bad credit loans because they are the same; that is, they are only offered to people with heightened risk factors.

What is a Subprime loan?

Subprime loans are your type of loan that is generally offered to people who have heightened risk factors such as limited credit history, low income, low credit score, etc.

Unlike a conventional loan, subprime loans have high-interest rates. Technically, most of these loans have a subprime loan counterpart, including mortgages, auto loans, personal loans, etc. However, even though there is no official credit score cutoff for borrowers, people who have a credit score below 650 usually have a more challenging time getting approved for a conventional loan. And that’s where subprime loans enter the conversation.

Of course, getting approved for a loan depends on several factors. But, the most integral part of being approved for a conventional loan is a passing credit score, which some people don’t have. If you’re just starting to build your credit, this could be disadvantageous to you since you will have a hard time getting approved for conventional loans.

That said, subprime loans were created to help those with poor credit scores to acquire a house, car, financial assistance, etc. Such loans have different features that vary from lender to lender. However, most subprime has two traits in common: higher interest rates and high closing costs.

Types of Subprime Loans

If you’ve done your research on subprime loans, you can see that each subprime loan varies from lender to lender. But in actuality, there are three main types of subprime loans.

Subprime Home Loans

Mortgages, in reality, can be categorized into two main groups, mainly prime and subprime mortgages. Prime home loans are what you call conventional home loans that are the ones that you commonly see in the market. Subprime home loans are just prime home loans that have a slightly higher interest rate in simpler terms.

Subprime mortgages can be categorized into three main groups: adjustable rate mortgages, fixed-interest mortgages, and interest-only mortgages. Typically, subprime mortgages are only given to people who have credit scores below 650.

Subprime Auto Loans

Just like the case with subprime home loans, subprime auto loans are just your conventional auto loans, albeit with a higher interest rate. However, nowadays, it’s harder to get approved for a subprime auto loan because lenders are more strict in the assurance that the borrower will not default the loan.

To combat this uncertainty, most lenders nowadays are offering subprime loans with longer repayment periods to ensure that the borrower will repay them. Some lenders have a period that lasts for 69 months, and some go as far as 84 months.

Subprime Personal Loans

Personal loans are typically unsecured, which means they don’t require any collateral, making it risky for lenders to offer subprime personal loans for obvious reasons. You might as well opt for secured loans to have a lower interest rate instead.

Pros of Subprime Loans

Subprime loans usually have a poor image because of their higher interest rates. But they are not all that bad as there are also benefits to them. The most obvious benefit of subprime loans is that it’s easier for people to qualify for a subprime loan even though they have a poor credit score or little credit history. This means that it will be more convenient for people to build their credit if they’re just starting.

Since you can use a subprime personal loan, it will also be easier for people with bad credit to consolidate their debts, improving their credit score. This will also make their payments easier and manage their finances better. Subprime loans can also enable people who are just starting to build their credit to become homeowners or buy a vehicle when they couldn’t opt for conventional loans.

Cons of Subprime Loans

Since subprime loans carry huge risks for lenders, they counteract this by giving them higher interest rates. And the resulting scenario is the person defaulting the loan because they can’t keep up with interest.

Not only that, but subprime loans also carry a lot of fees such as processing fees, closing costs, up-front fees, etc. These can add further to your debt, which can be a real burden if you’re on a budget.


Subprime loans are not to be trifled with if you don’t know what you’re getting into. Before you apply for one, ensure that you have exhausted your options to get a conventional loan. Also, do your research first before taking out a subprime loan. Balance its pros and cons and ensure that you won’t be taking a huge loss in return. Lastly, subprime loans should be taken as a last resort, not your first choice.

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