YOUR LOAN OPTIONS

by Kathleen Seligman
6/12/2006

It’s no secret that money makes the world go around. It’s also a fact of life that at some point, you might find yourself in need of some extra cash. When that happens, there is an entire menu of personal loan options for you to choose from. From general loans that can be used to meet a variety of needs to specialized loans, you can borrow money to buy a car, make home improvements, pay for your child’s education, consolidate your bills, or take that vacation you’ve always dreamed about.

LOAN TYPES

Auto Loans

Auto loans are the most common types of loans and are ideal whether you’re buying a new or used car. These loans can include amenities geared specifically for car owners such as emergency breakdown coverage, reduced-priced car insurance, and other car-related discounts. Unlike many loans that require you to go to a bank, you can apply for auto loans directly from car dealerships or manufacturers. Though convenient, going straight to the source can, however, result in higher interest rates.

Education Loans

Education loans are generally either Stafford Loans or private educational loans. Stafford loans can be subsidized or unsubsidized, with subsidized loans not accruing interest until the student begins to pay off the loan. Subsidized Stafford loans are issued based on student need. Students can use both Stafford and personal education loans to pay for tuition and other education-related costs. After school ends, educational loans allow students a six-month grace period, after which time they must begin to repay their loans.

Home Equity Loans (Closed-End)

Loan amounts for closed-end home equity loans are determined by the amount of equity in your home. Home equity loans are secured loans that use your house as collateral and therefore have a lower interest rate than other loan types. Home equity loans provide you with a lump sum that you can use for whatever you need. Common uses for home equity loans, also known as second mortgages, include home improvements, medical bills, debt consolidation, and personal enrichment.

Home Equity Line of Credit Loans

Line of credit loans act like a credit card that is tied into the equity of your home. Instead of a lump sum, you have access to a specified loan amount from which you can take out as much or as little money as you need. There are two phases to line of credit loans: the draw phase and the repayment phase. During the loan’s draw phase, you can continue to borrow from your loan’s amount, and if you choose to pay any money back, that money goes back into your line of credit where you can take it out again if you need to. In your loan’s repayment phase, you can no longer borrow money from the loan, but must begin your regular monthly payments.

Home Improvement Loans

These are unsecured loans that provide you with funds for improving or making additions to your home and property. Home improvement loans can help you fix your roof, build a deck, or add a room. The money you get from a home improvement loan, as well as the interest you pay on the loan, is tax deductible, and the changes you make can also increase your property value. Like home equity loans, these loans act as a second mortgage, but you don’t need any equity to be eligible for a home improvement loan.

Mortgage Loans

Mortgage loans help you to purchase a home or property. When taking out a mortgage loan, there are many choices available that allow you to tailor your loan to your specific needs and financial situation. Between variable or fixed interest rates, short or long term loans, high or low down payments, and optional points, you can create a mortgage that works for you. As you search for the best deal on your mortgage loan, keep in mind that large down payments, longer loans, and high credit scores all work to decrease overall interest rates.

Refinancing Loans

A refinancing loan pays off and replaces your current mortgage at a lower interest rate. Borrowers can also chose a “cash-out” option on their loan that draws out a lump sum from their home’s equity. This portion of the loan can then be used to pay off bills or large unexpected expenses. Applying for a refinancing loan is similar to applying for your initial mortgage loan, and therefore can include expensive additional costs and fees.

REPAYING LOANS

The process of loan repayment is generally the same for most types of loans: after receiving your loan amount, and after any grace or draw period has ended, you are responsible for repaying your loan through regular monthly payments. There are, however, ways you can make the task both shorter and less painful for your wallet.

• Get a co-singer for your loan. Co-signers can increase your chances of being approved for a loan as well as lower your loan’s interest rate.
• Make additional loan payments. A large part of your monthly loan payments will be used to pay on your loan’s interest. By making additional loan payments, or paying extra and specifying that the money be applied to your loan’s principle, you can save thousands of dollars in interest.
• Lock in a fixed interest rate. Loans with variable interest rates can fluctuate unpredictably and reach much higher percentages than loans with stable fixed rates.
• Make a large down payment or trade-in. The more money you can knock off your initial loan amount, the less money you’ll pay on your loan and its accruing interest.

USEFUL LOAN TERMS

Collateral – Items of value, such as a home or car, which are used to back a loan. If you fail to repay your loan, then your collateral will be repossessed to pay off your loan amount.

Co-signer – Someone who signs the loan with you and agrees to pay off the your loan if you cannot. A co-signer has the same legal responsibilities as the person applying for the loan.

Equity – The amount of money you have paid on your house or property. Equity is the difference between your house’s value and how much you owe on your original mortgage’s principle. Many loans use this to determine how much money you can borrow.

Fixed Interest Rate – The interest rate of your loan will remain the same for the loan’s full term.

Prepayment Penalty – An additional charge added to your loan if you pay off your loan before the loan’s term ends.

Secured Loan – A loan that is backed by collateral. If you take out a secured loan and are unable to pay it back, your collateral will be used to repay the loan.

Unsecured Loan – A loan that is not backed by any collateral. Considered riskier loans by lending agencies, unsecured loans have higher interest rates than secure loans.

Variable Interest Rate – The interest rate of your loan will fluctuate with the market throughout the life of your loan.

While there are many different types of loans, and it may seem tempting to jump into the borrowing pool, there are some loan pitfalls you should be aware of. First, with loans that use your home as collateral – such as home equity loans – comes the risk of losing that home if you are unable to repay the loan. Second, some loans may try to get your attention with low interest rates, but come with hidden fees that can increase your initial loan costs as well as decrease the amount of your loan that you can use. Finally, if you default on any loan, you could significantly lower your credit score, which can make it more difficult to get loans in the future.

Before taking out any loan, be sure that you understand its terms and are confident that you’ll be able to repay the loan.

But don’t let this discourage you from applying for a loan. When managed properly, taking advantage of your many loan options can open up a new world of financial flexibility. Making use of different loans offer creative ways for you to manipulate your money and better enjoy the hard earned fruits of your labor. Armed with the knowledge of various loans, you can firmly take control of your finances and borrow with confidence.

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