Loans are easy to find these days, but struggling to pay them back can wreak havoc on debt management efforts. Unfortunately, the easiest loans to get are often the most costly to pay back. Before you decide to borrow money, consumer credit counselors advise reviewing all lending alternatives and carefully reading all documents.
Make sure you read and understand all the terms in the agreement, debt management experts advise. Does the credit card require membership or annual fees? Are the rates variable or fixed (the differences can be hundreds of dollars)? Do you understand how your finance charges are calculated?
If you must borrow money, credit counselors say, be sure to budget for payments, interest and finance charges. For example, on a $500 loan at 18% interest, the minimum payment is $20. Not a big monthly hit, but it will take nearly five years to pay that off, with interest of $216.14. At those costs, credit counselors at Clearpoint warn that a loan should be a last resort. Maybe you shouldn’t borrow money now; have you tried saving for purchases?
If a loan is your best option, it is critical to select one appropriate for your personal situation. Don’t borrow money from a lender without knowing the different types of loans. Debt management experts explain the most common types:
Home equity loans: Based on the equity you have in your home. They are common but risky, according to consumer credit counselors, because your home is pledged as collateral. The Federal Trade Commission has published a warning about scams on their website as well. Essentially, this is a form of secured debt consolidation and risks your best financial asset.
Payday loans: Short-term, high-interest loans that are illegal in some states. You borrow money against your next paycheck and must pay weekly interest rates as high as 20%. If you miss a payment, you must file for an extension and pay a fee. Annually, you could pay as much as 250%.
Term loans: Available from finance companies, these carry fixed interest rates comparable to those of high-interest credit cards. They include charges such as mandatory life, credit and health insurance policies. State laws govern these loan amounts and rate ceilings, so be sure to research your state regulations.
Credit cards and “credit-card flipping:” (Credit consolidation deals) These are offered by many companies, but most have a catch. Some offer small lines of credit with high annual fees. Some offer introductory interest rates that increase once your application is accepted. Others offer “secured cards” that require deposits in low-yielding savings accounts.
Reverse mortgages: Payments made to you against the equity you have in your home. In effect, the creditor is gradually buying your house. As long as you live there, you do not have to pay back the loan. Receiving regular monthly payments can be tempting, especially to retirees on a fixed income. But debt management experts point out that once your home is purchased, you no longer own your most substantial asset.
People borrow money for different reasons. What is yours? If you want to borrow money as a form of bill consolidation or debt consolidation, be very careful. An alternative to debt consolidation is restructuring your budget to pay down debt with a DMP. The credit counseling experts at Clearpoint are trained to educate consumers in how to effectively evaluate and manage their finances for effective debt management. Call 800.750.2227 (CCCS) to make an appointment for free credit counseling, or get started online now.
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