Consumer Loans: Explore Your Lending Options
There is a vast array of consumer loans, and choosing which is going to work best for you is your first step when borrowing money. They all come with pros and cons, so it’s worth spending a few minutes equipping yourself to make the smart choice.
Categories of Consumer Loans
Before looking at individual types of loan, you need to know a bit more about the two main categories:
A secured loan is one where the lender has a right to take a particular asset from you if you fail to live up to your end of the bargain. Most commonly, that’s your home if you have a mortgage or home equity loan, or your vehicle if you have an auto or RV loan. Because your lender has that right, it’s less likely to suffer a big loss if the loan goes bad. And that reduced risk means it can normally offer you a lower interest rate.
However, securing a loan on a house involves a long and fairly expensive legal process, so expect to have to wait longer to get your money and to pay more to set up the loan if you want a mortgage or home equity product. The most serious drawback with these is also the most obvious: If you get into financial trouble, you stand to lose your home or car or truck or RV.
With an unsecured loan (that’s nearly all credit cards, store cards and personal loans), the lender can’t foreclose on your home or repossess your vehicle, so it’s likely to charge a higher interest rate to cover the additional risk, which can make this sort of borrowing relatively expensive. Of course, it will still come after you hard with collection agencies and court proceedings if you go into default. But the good news is unsecured loans tend to be quick, easy and cheap to set up. The bad? The lack of security means those with poor credit scores are likely to be either turned down or charged a ruinously high interest rate.
An open-ended loan (also known as “revolving credit”) offers continuing access to a line of credit. In other words, you’re given a credit limit and can borrow as much or as little as you want up to that amount. Your monthly payments will vary depending on your current balance, and these are almost always variable rate loans so your interest payments can also change. The most common forms of open-ended loans are credit cards and store cards.
A closed-ended loan (a.k.a. “non-revolving credit”) gives you a lump sum, which must be paid back within an agreed period in equal monthly installments. These only change if you have a variable rate loan and the interest rate changes. So close-ended loans include mortgages, home equity loans, auto loans and personal loans. Some of these have fixed rates and some variable ones.
A third category is a hybrid of those two. A home equity line of credit (HELOC) comes with a fixed end date, but you can borrow as much or as little as you want up to your limit at any particular time, providing you pay it all down by the end. As with credit cards, you pay interest only on your current balance. Often, HELOCs have a fixed period when you can borrow (the draw period), followed by a repayment period when you can’t borrow more and instead have to pay back.
9 Popular Consumer Loans
All mortgages are secured, closed-ended loans. The most popular ones have fixed interest rates, but you can choose an adjustable-rate mortgage (ARM) if you prefer. Indeed, in some circumstances, ARMs can be the smart choice. Most mortgages have 30-year terms (last 30 years), but 15-year ones are quite common, and you can ask for another term if that would suit you better.
Traditionally, mortgages required big down payments, but various government-backed programs let you put down as little as 3 percent. Some, backed by the U.S. Department of Veteran Affairs and the U.S. Department of Agriculture, require no down payment at all, but you have to qualify for those. Learn more about mortgages and get quotes from multiple lenders.
So you have a mortgage already, but you think you’d be better off with a new one. Maybe you’re due a lower rate because your credit score has improved since you applied for your current one. Or perhaps your home is worth more than your mortgage balance (you have “equity”) and you want to access some of that money in a “cash-out refinancing.” Discover more about your refinancing options and get multiple quotes.
If you’re a homeowner age 62 years or above, you may be able to use the equity in your home to make your golden years more enjoyable – without moving or downsizing – with a reverse mortgage. You can get a lump sum, a monthly income for an agreed period, a monthly income for life, a line of credit or many combinations of those. And you don’t have to repay a cent until you move or die, because all your payments, including interest, are rolled up, and only fall due then.
You do, however, have to maintain your home in decent condition and stay current with property taxes and home insurance premiums. So don’t touch one of these loans unless you’re confident you can do that. Find out more and get quotes.
Home Equity Loans
These secured, closed-ended loans are sometimes called second mortgages, because … well, that’s what they are. They’re a way to access some of the equity in your home without refinancing, something that’s very valuable when interest rates are rising.
You get a lump sum, which you can use for any purpose. You’re likely to pay a slightly higher, fixed rate than you do on your main mortgage, but other than that this is generally a very inexpensive way to borrow, especially as you may be eligible for tax advantages. Get quotes and more information.
Home Equity Lines of Credit (HELOCs)
We mentioned these above. HELOCs are another form of second mortgage (so you might get tax breaks), but instead of a lump sum, you get a line of credit, and can use as much or as little of that as you choose. And, subject to minimum payments, you can borrow and repay sums whenever you want, just like with a credit card. But, unlike with credit cards, your interest rate is likely to be low.
There’s another similarity with credit cards: These can tempt you to overspend, and some people find themselves in trouble when the draw period (when they can borrow) ends, and the repayment period begins. So HELOCs are best for good money managers. Oh, and they typically come with variable rates. Learn more and get quotes.
Auto loans are secured, closed-ended loans, like mortgages – but you’re putting your car or truck on the line rather than your home. Interest rates tend to be higher than for loans secured by homes (vehicles depreciate!), but lower than for other types of borrowing.
Before you go near a dealer’s lot, get multiple quotes from other lenders. Car salespeople are notorious for pressuring customers into taking their dealership’s credit, often at much higher rates than are available elsewhere. So go armed with solid information so you can put up some resistance.
Because these closed-ended loans are unsecured, you’re not putting your home or anything else on the line with personal loans (sometimes called signature loans) if things go wrong. Indeed, you don’t have to be a homeowner to get one.
But the downside of that is you’re likely to pay a higher rate than you would with a home equity loan or HELOC. Still, they’re generally much more affordable than credit cards, and if you’ve a great credit score (find out yours now) you should be able to find a lowish interest rate. Expect to pay more if your score is iffy, but still typically less than with plastic. Again, get multiple quotes and learn more.
Student loans can be pretty complicated, and it’s worth reading up on them. That’s because there are many choices, and picking the right one for your personal circumstances might save you serious money. So check out the U.S. Department of Education’s website, as well as the LendingTree one.
One of the best things about student loans, which are closed-end and unsecured, is that lenders are less sensitive to your credit score than they are with most other forms of borrowing. So you could still get a great deal, even if you’re too young to have established your credit file.
Credit cards are a fantastic way to pay for purchases because they come with statutory consumer protections that are better than those for debit cards, checks, cash or any other form of payment. And many offer rewards, too.
But they can be lousy ways to borrow – especially if you’re talking about large sums over long periods. That’s because they nearly all charge relatively high interest rates. So, if possible, it’s beneficial to zero your balance each month.
If you’ve good credit and a high balance, explore balance transfer credit cards, which can give you a breather from interest charges, and allow you to pay down what you owe more quickly. But it’s best to do that within a disciplined debt-reduction plan, or you could be tempted by your extra credit line and end up owing more in the end.
Plastic with a zero-percent introductory APR can also be an excellent way to buy big-ticket items. With these, you can pay back your loan interest-free over an extended period: at the time of writing, up to 21 months. But again you’ll be best off if you’re disciplined and zero that balance by the time the introductory period expires.
Unlike with other forms of borrowing, you don’t get multiple quotes for credit cards. Instead, you simply compare offers online, pick the one that suits you best, and apply. Look out for ones that offer good rewards that align with your lifestyle.