- A home equity loan could be a smart way to pay off high-interest debt or pay for home repairs. But consider carefully before taking out a home equity loan. If you are unable to make payments on time, you could lose your home.
- Home equity loans can either be a revolving line of credit or a lump sum. Revolving credit lets you withdraw funds when you need them. A lump sum is a one-time closed-end loan, for a particular purpose, such as remodeling or tuition. Apply for a home equity loan through a bank or credit union first. These loans are likely to cost less than those offered by finance companies.
- Before you sign an agreement for a loan to buy a house, a car or other large purchase, make sure you fully understand all the lender’s terms and conditions, including:
- The dollar amount you are borrowing.
- The payment amounts and when they are due.
- The total finance charge, the total of all the interest and fees you must pay to get the loan.
- The Annual Percentage Rate (APR), the rate of interest you will pay over the full term of the loan.
- Penalties for late payments.
- What the lender will do if you can’t pay back the loan.
- Penalties if you pay the loan back early
- The Truth in Lending Act requires lenders to give you this information so you can compare different offers.
Payday and Tax Refund Loans
- Payday loans are illegal in some states. Recent changes in the law for payday lenders have also made payday loans illegal for members of the military. With a typical payday loan, you might write a personal check for $115 to borrow $100 for two weeks, until payday. The annual percentage rate (APR) in this example is 390 percent! If you can repay the loan quickly, it may not appear such a bad deal. But if you can’t pay off the loan quickly, that relatively small loan can grow into a large amount of debt. At 390 percent, a $100 loan will become $490 in a year and $2,401 in two years.
- Another high cost way to borrow money is a tax refund loan. This type of credit lets you get an advance on a tax refund for a fee. APRs as high as 774% have been reported. If you are short of cash, avoid both of these loans by asking for more time to pay a bill or seeking a traditional loan. Even a cash advance on your credit card may cost less.