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High-interest loans may create perpetual debt cycle

From month to month, many families face serious challenges in keeping up with bills. When these expenses begin to mount, it may be difficult to know exactly how to keep up. At this point, a short-term, high-interest loan might seem like the best option to take care of immediate expenses.

The problem with these kinds of loans is that many people are only able to keep up with interest payments, which can create a long series of debt issues. Taking this approach might cause a person to wind up paying back much more than the initial loan was worth as a result of exorbitant interest rates.

According to a report from AARP, car title loans are particularly concerning for consumers. This type of loan might be easy for a financially distressed person to receive because there is often no credit check requirement. In fact, a person may only need to provide proof of car ownership. Those who can't keep up with loans often roll payments over into a new loan or face vehicle repossession, as the car’s title is offered up as collateral.

According to a representative from the Virginia Poverty Law Center, a person who takes out a $1,000 car title loan might wind up paying back 3 or 4 times as much. For someone already dealing with financial issues, this could be incredibly damaging.

Before pursuing a high-interest loan, it might be best to explore other options. Rather than assuming additional debt, it may be best to explore ways to find debt relief. This way, a person can ease financial stress for the long term.

Source: AARP, "Car Title Loans May Wreck Your Finances," Lynnette Khalfani-Cox, Jan. 17, 2014

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