Here’s what amazes me: how easy it can be to borrow money. As long as your credit is decent, there never seems to be a shortage of people wanting you to open a new credit card, buy a car, use a personal or signature loan, even take out a home loan. Spending other people’s money can seem like a lot of fun… until the “catch” catches up with you in the form of crazy high interest or unrealistic payment terms. Or until you realize that you actually spent your money – money you don’t have!
As part of my financial makeover this year (doesn’t that sound more fun than “new year’s fiscal improvement resolution?”) I am taking a good hard look at loans to make sure that what I’m getting is really worth it. Maybe what I have learned can help you too.
If you want to spend money on something, there is probably a loan available for it! Incredible. Here are some of the more common types of loans and some things to keep in mind:
- Auto loan. Just what it sounds like – a loan to help you buy a car! Financing is generally available for both new and used vehicles, and you can also get financing for other fun stuff like RVs, motorcycles, and boats depending on the lender. Know how much you can afford to pay each month, then find a car that meets both your needs (or wants!) and your budget. Follow these easy steps: http://www.ftwccu.org/home/auto/auto
(Beware of: fast-talking car salesmen! Ladies, you know the deal – that car dealership is all about making the sale and making money off of you. Don’t fall for the pressure tactics; shop smart by securing loan approval at a good rate before you start test-driving.)
- Mortgage. Mortgage loans help you purchase or refinance a home, and they come with all kinds of abbreviations. FHA, VHA, HUD, ARM – you might feel like you are wading through alphabet soup! First figure out how much of a payment you can realistically manage. Buying a house shouldn’t mean giving up every “optional” item in your currently monthly budget. Next, research current rates and loan options. Talk to FTWCCU for help on figuring out what length and what type of loan best suits you. And check out this helpful site, where you can find information and payment calculators: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx.
(Watch out for: details like variable rates and interest-only payments. A variable rate means lower payments now but the risk of larger payments in the future; interest-only payments may also be more affordable but don’t allow you to build any equity.)
- Home equity loan. Also called a second mortgage, this type of loan lets you borrow money by using your home as collateral. Basically, you have stored up some value in your home (usually a combination of your down payment, monthly payments toward principal, improvements, and any growth in the market) and now you have an option to use that value as money.
(Remember: the fact that this type of loan reduces the equity in your home. Be careful how much you borrow, especially in today’s market conditions – you don’t want to find yourself owing more than your home ends up being worth later on)
- Home equity line of credit. It sounds an awful lot like a home equity loan, but there’s an important difference. A home equity line of credit (or HELOC) is a line of revolving credit with an adjustable interest rate, whereas a home equity loan is usually a one-time lump sum amount that often has a fixed interest rate. A HELOC gives you some flexibility in deciding when and how much of your home equity to borrow.
(Keep in mind: the same concerns as with a home equity loan, plus remember that a variable rate means the amount you have to pay might not be as predictable.)
- Student loans. Private student loans help you cover the gap between what tuition costs and what you are able to cover using scholarships and federal loans. Private student loans not only help you pay for tuition, but can also help you pay living expenses associated with getting a college education.
(Keep in mind: education savings options like state-run 529 plans. Saving early (and often!) for education means less need to borrow.)
- Personal or signature loan. These tend to be smaller loans that you can use for stuff like buying a computer, going on vacation, etc. A personal/signature loan is unsecured, which means the lender is relying on you to pay it back (unlike a car loan or home loan, where your car or your home is the collateral). Because of this, the rates might be a little higher because the lender is taking more of a risk.
(Watch out for: shorter repayment terms and loans with prepayment penalties.)
- Payday loan. Also known as a cash advance, this is a small short-term loan intended to help cover your expenses until your next paycheck.
(Beware of: high interest rates, service charges, and predatory lenders. Seriously! This type of loan might seem like a good idea but it can get you in trouble fast. Do yourself a favor: get yourself on a good, functional budget if you haven’t already – that will help you get in the green and avoid the temptation of this type of loan.)
- Credit cards. My goodness, where to start? This topic deserves its own article. For now I’ll just say beware the charms of little magic piece of plastic. It is not always your friend.
Now, like I said – there are plenty of organizations out there who would be willing to loan you money. The trick to being a savvy borrower is working with a financial partner who looks out for you, not just for themselves. That’s why I am a big fan of credit unions. Credit unions offer all the same services as a bank, but because they are individual not-for-profit institutions where every member has a stake in the game, you tend to get treated better and get a better deal on loan rates. After all – at a credit union you are a part-owner so the benefits come back to you in the form of savings, rather than lining the pockets of some fat cat somewhere. Make sure you are getting your money’s worth out of loans by visiting http://www.loansworthmore.org/.