Sometimes debt is unavoidable. Most of us don’t have the cash to buy a home outright — to cite the most obvious example — so we get a mortgage.
Many of us never manage to save enough money for an emergency fund, so when a major expense comes up — say, the water heater dies or we run up a mountain of unexpected medical expenses — we need a loan or credit to cover it.
The only trick is to secure the type of loan that best fits your needs and your credit standing at the best possible price and with the least risk. Read on to see which type of loan makes sense for you.
1. No-interest credit cards
If you have run up a balance on credit cards and you’re paying a high interest rate — current rates are running upward of 25% APR — shame on you!
Seriously, though, if plastic is how you covered an unexpected expense — a new refrigerator or furnace, say — and you need time to pay it off, we get it. One option is to apply for a credit card that charges 0% interest on balance transfers for a period of time.
Cost: Occasionally, you can get a balance transfer card that does not charge a fee for the transfer. More typical, however, is a 3% or 5% fee on the balance moved over from the higher-interest card. So, if you transfer a $6,000 balance, the fee would be $180 at 3% or $300 at 5%.
Term: A 0% interest credit card is a short-term solution. So, make sure you have a plan in place to pay off the balance before the grace period ends.
These grace periods typically stretch from six to 18 months, and occasionally as long as 21 months. After that, the interest rate will soar.
Buying a home is for most of us the biggest purchase we ever make. So, the terms of the mortgage we use are critical — and can mean a difference of tens of thousands of dollars over the life of the loan.
That’s why we have many articles on Money Talks News that lay out how to get the best mortgage you can, and we offer a place in our Solutions Center to search for the best interest rates currently available.
Well before you start house hunting, check out “9 Tips for Getting the Best Deal on a Mortgage,” which will walk you through the entire process — all the way up to being pre-approved for a mortgage based on your financial circumstances and credit.
Cost: The good news for homebuyers is that mortgage rates are relatively low, historically speaking — less than 4%, even for a 30-year fixed-rate mortgage, on average.
Term: Traditional mortgages typically have a 30-year term, but you can choose a shorter term, like a 15-year mortgage. With a shorter term, your monthly payment will be higher, but you will pay less in interest over the life of the loan.
3. Home equity lines of credit and loans
If you’re a homeowner — either outright or with some mortgage debt — then you likely are qualified for a loan based on how much equity you have in your home.
These loans can be a great way to cover something big, like a major remodeling job or an unexpected tax bill. You could also use one to consolidate high-interest credit card debt.
Traditionally, there were two basic products:
- Home equity line of credit (HELOC): A preapproved amount that you can draw on as needed, typically with a variable interest rate and payments that are based on the amount outstanding, similar to a credit card — but normally a lot cheaper
- Home equity loan: A lump sum with a fixed interest rate and monthly payments
These loans are readily available through banks and credit unions. Just walk through the door of your institution and apply. That’s a reliable, old-fashioned approach.
But now there’s a service that allows you to get through the process in record time. Figure Technologies can help you get a home equity line of credit of $15,000 to $150,000 — at a fixed rate — in a matter of days.
Through a process that starts with a short two-screen form, you can get a quote, finalize paperwork and get funded entirely online without the weeks- or months-long process that has traditionally accompanied HELOCs and home equity loans. (I was pre-qualified for $98,000 in minutes.)
Check out this post for all the details on Figure: “How to Get a Loan Fast by Tapping Into Your Home Equity.”
Cost: Interest rates on home equity loans and HELOCs are generally higher than mortgage rates but lower than rates for many other kinds of loans — in the 5% to 10% range at the moment.
Note that fees and interest on these loans may be tax-deductible, but be sure to check with your tax adviser about your loan product.
Term: You can get terms of five to 30 years with these loans.
Important: A HELOC or home equity loan is secured by your property. If you can’t make the payments on the loan, you could lose the house. So, be realistic about the payments you can make — and never use this or any other type of loan to live beyond your means.
4. Peer-to-peer lending
Peer-to-peer lending systems operate online to match people who need loans with lenders. The idea is that technology eliminates the need for bank branches and infrastructure, and that this efficiency is leveraged to the benefit of both borrowers and lenders.
These lenders are investors looking to get a better return on their money than they could with a bank savings account, and borrowers may get a short-term loan at a lower cost than banks are offering.
Cost: Interest rates and origination fees vary widely depending on a borrower’s creditworthiness and the amount of the loan. For instance, the APRs for Prosper personal loans range from 6.95% to 35.99% for first-time borrowers.
Term: Typically five years or shorter
5. Credit unions
Credit unions typically offer more flexible lending options and lower rates than banks. There’s a simple reason for this, explains Money Talks News founder Stacy Johnson: Credit unions are not-for-profit.
“When you’re not trying to make a profit, you can pay more on your savings accounts and you can charge less on your loans. So, if you’re a customer of a credit union, you’re often going to find lower rates on loans and higher rates on savings. And since they’re smaller than the big boys, you might also find more personal service.”
For people with decent credit, credit unions will sometimes offer signature loans — that is, an unsecured loan guaranteed only by a signature.
Credit unions can also be a good bet for borrowers with less-than-stellar credit, according to Nerd Wallet:
“A low credit score alone won’t disqualify you from getting a loan. Credit unions also consider your whole financial picture, including your credit history and standing as a member with the credit union, when reviewing your loan application.”
Cost: Varies depending on credit and other factors
If you’re looking at borrowing money and you don’t see the type of loan you’re looking at above, then at least make sure it’s not on our “bad loans” list before you move ahead. Check out “7 Terrible Ways to Borrow Money” so you know what to avoid.
Finally, if you’re deep in debt and need help managing it, check out our Solutions Center, which offers resources to help you consolidate and pay down debt, handle debt collectors and restore your credit.
What’s your experience with taking on debt? Share with us in comments below or on our Facebook page.
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