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Not all loans and credit products are created equal. Which ones are good for you?

loans

There are many different types of loans and credit products. When one gets a loan, you are essentially buying both money and time. Different products have different objectives, and when you mismatch those, you can end up paying way more than what you should. Any decision should be made considering a person’s specific situation, but we try to simplify the drill, and list the main issues of each credit product.

Auto loans

Buy or trade in a car and get one of those. If you didn’t finish paying your old auto loan, it is not time to trade in. Never take cash back from the dealer. They are not being nice; you will pay back with interest later on.

Credit cards

Good for emergencies only. Credit cards should have their balances paid in full by the due date. If you are not doing that, unless you are talking about big emergencies (I mean hospital like emergencies) you are literally giving money away.

Payday loans

Short answer is: don’t take them. They are the last resort. If you ever enter in one, your top financial priority is to get out of it. Sell stuff if you need and make sure to reduce your expenses, even if it is hard.

Mortgages

Only to buy a house. Look for the lower rates and not the highest credit limit. If this means buying a smaller house, let be it.

Home equity loans

If you have a healthy budget, you shouldn’t need it. If you need a temporary, and really temporary, cushion, you might consider, but this requires a lot of thought.

Student loans

They are good, but only in the right doses. Whatever you take, you have to pay back in the future, but with compounded interest. So take as little as you can.

[1] Different Needs, Different Loans http://www.investopedia.com/articles/pf/07/loan_types.asp

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