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Wednesday, March 4th, 2015


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Beyond Student Loans: Consumer, Home, Payday and More

 It’s getting a little embarrassing driving mom and dad’s rusty 1996 Chevy Caprice station wagon to work each day.  You cower every time one of your co-workers notices you in the employee parking lot.  You’re making good money now so maybe it’s time to be riding in something with a bit more panache. 
You could probably scrounge up some money to buy one of the used cars you found online.  But, who knows what dirty little secrets might be lurking under the hood. Perhaps a new car would cost you less in the long run.  How do you come up with the money for a new car?  The dealer says you’re eligible for a loan. 

Is it to your advantage to borrow money?  That depends on what you need the money for and how and when you plan to repay it.  Borrowing for something intangible, such as a vacation is not prudent, because when the experience ends, all you have to show for it is debt.   Getting a loan for a big dollar item and paying it back responsibly could be an excellent way to establish a credit history.  There are several different types of loans.

Consumer loans
Consumer loans are given to individuals for personal or household needs, such as auto or boat loans.  Secured consumer loans are backed by assets called collateral.  Some consumer loans are unsecured loans.  When financing a new car, you might find a loan with a lower interest rate at a credit union or bank rather than with the car dealer.  You want to find out before you head to the auto dealership and use the interest rate as a bargaining tool.  The interest on a consumer loan is not deductible on your federal income tax.

Say no way to payday loans.
 When you do an Internet search with key words payday loans, and you are likely to find over nine million results.  Also called fast cash loans or cash advance loans, they frequently advertise on TV.  It seems that payday loan shops are on every corner, but that doesn’t mean that they are smart for the consumer, namely you.   Payday loans are very popular because they are quick and easy to obtain, and use your paycheck as collateral, but they charge ridiculously high interest rates.  Try to keep from getting down on your luck; payday loans are marketed to vulnerable people who have no other options for borrowing money.

Mortgage
 In the past, mortgages used a fixed interest rate and were typically issued for 15 or 30 years. In recent years, adjustable rate mortgages (ARM) have become more widely used.  Also called balloon loans, they have an initial low rate, usually for the first five years, then the interest rate increases.   Interest on a mortgage is deductible on the Schedule A of your federal income tax.

There are sometimes special programs for first time home buyers.  The Department of Veteran Affairs offers VA loans to those who’ve served in the military.  The Federal Housing Authority (FHA) loans require low down payments; they are sometimes easier to get than other mortgages.  The Rural Housing Service (RHS) loans have minimal closing costs and no down payment.  There are also some state and local mortgage programs. 

Then, there’s Fannie Mae, not the candy, but the Federal National Mortgage Association.  Freddie Mac is the Federal Home Loan Mortgage Corporation, and Ginnie Mae, the Government National Mortgage Association (GNMA).  It’s important to note that the credit crisis of 2008 wreaked havoc on many of these government programs and consequently, regulations that determined eligibility have become much more stringent.

Home improvements.
 A home equity loan (HEL) is money borrowed specifically for major home improvements such as siding or a new roof. Collateral is the equity in your home.  If you default (don’t pay the loan), the lending institution, gets your house. 

It’s your business
 A business loan is another type of borrowing.  Some are long term while others are shorter.  Money might be needed for start-up costs or for equipment or inventory.  Your bank will require a business plan to understand your mission before lending you money.

 Loans, if repaid in a timely manner, are a great way to pay for expensive purchases while establishing a credit history.  Work closely with your lending institution and you can move toward your financial goals without taking on too much debt.  Responsible borrowing can be a smart way to realize your dreams. 

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One Response to Beyond Student Loans: Consumer, Home, Payday and More

  1. Debra Karplus, author says:

    I welcome your comments about my article.

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