Borrowing Options

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Beyond Finance TeamPosted on May 10, 2018

Because every credit card and loan option has its pros and cons, it is important to understand which options work best for you. Frequently, loan applications are organized in such a way that all you have to do is fill in the blanks associated with the different loan options. Perhaps the reason for this is the commonality of purpose and the multitude of people applying for credit cards or specific types of loans such as home mortgages and auto loans.

Credit Cards

Credit cards are convenient for purchasing items of necessity. And, when respected and used properly, credit cards make life so much easier. Nevertheless, if you abuse the use of a credit card, it can lead to a debt snowball and cause years of financial hardship and angst – possibly even credit counseling services or bankruptcy.

When selecting a credit card, there are many different options available. However, the two most important components of any credit card are its annual fees and interest rate. Credit card issuers determine the following:

  • The annual percentage rate (APR)
  • The grace period until a payment is considered late
  • The financial calculation for determining the outstanding balance
  • Annual fees and other charges
  • The minimum monthly payment

The above components are the governing factors that determine how much your credit card will actually cost you. So, let’s define them in more detail.

APR

For many people, understanding the annual percentage rate (APR) is a daunting task. The simplest explanation is this: the APR defines what your borrowing cost will be on any outstanding balance over a period of 12 months.

When you examine the APR on credit cards, you will see a few common variables; there is an “introductory” APR rate, a standard APR on your purchases, an attractive APR for balance transfers, and potentially, a higher APR for “cash advances.” A credit card interest calculator can help you determine what amount of payment to expect based on your anticipated use.

Grace Period

Credit card issuers have learned that almost everyone from time to time require a few extra days to make a payment. Establishing a grace period provides a little breathing room for credit card users so that payments can be made after the due date without penalty should life get a little challenging. Without a grace period, if payment is not made by the due date, a late charge may be assessed. Additionally, many credit cards offer the opportunity to pay in full without incurring any finance charges. Finance charges can be assessed from the “time of purchase” if only the minimum payment or less is made.

Fees

Some credit card companies don’t charge annual fees for using their cards. Many do, however, so it’s important to find out how much the annual fee is to avoid future surprises. Most credit cards impose a late fee whenever, taking into account the grace period, the user does not pay at least the minimum amount and does not pay on time. What’s more, if the credit card company has attached a maximum limit on the available credit and you exceed that limit, you may pay an extra fee. Remember, all fees are in addition to the APR.

Non-collateralized Personal Loans

In today’s economy, the ability to qualify for a personal loan (also known as a “signature loan”) is reserved for those with an excellent loan payment history and a high credit score. The reward for maintaining an unblemished credit record is being able to secure a non-collateralized personal loan.

The best advice when pursuing a non-collateralized loan is to apply only after deciding on a lender. If you apply to several lenders at once, each will run a credit check to obtain a credit score. Too many credit score requests in a short period of time can negatively affect your score - something you want to avoid if possible. Remember, your credit score is the key to your borrowing future, so try to avoid any activity that might negatively affect it.

Sometimes lenders may “take a chance” on a borrower with a tarnished credit history and low credit score. If you are given a “second chance” take the opportunity to repair your credit and demonstrate to lenders that you are a responsible borrower - even though you may not receive the best interest rate.

Mortgages and Home Equity Loans

The American dream for many people is to own their own home. But for many, qualifying for a home mortgage isn’t a simple process. Once you’re approved and you’ve closed on the mortgage and moved into your new home, your mortgage will probably represent the largest payment you’ll have to make on a monthly basis.

With this in mind, you’ll want to educate yourself about the different types of mortgage loans available and choose the one that most closely fits your financial needs.

Mortgages are usually financed over a period of 15 to 30 years. Predicting how mortgage interest rates will fluctuate from year to year is impossible. If you’re nervous about the possibility of interest rates rising to a point where you might not be able to meet your financial obligations, you should probably consider a fixed rate mortgage rather than an adjustable rate mortgage (ARM). But if increasing interest rates over a period of time will not adversely affect your budget, then you may be better served with an ARM. What’s more, with an ARM, if interest rates decrease over a period of time, you may see your monthly mortgage payment reduced.

Refinancing Your Mortgage

Assuming you’ve built equity in your home, a mortgage refinance is often considered for a variety of personal and financial reasons. For most homeowners, the primary objective of refinancing one’s mortgage is generally to improve upon one of the mortgage’s key components; either significantly lowering the interest rate, changing from a variable (ARM) to a fixed interest rate, or changing the length (term) of your mortgage. Many times, a homeowner is simply looking to reduce their monthly mortgage payment with the hope of applying the extra disposal income towards debt consolidation, other financial obligations or their savings.

The above refinancing options reflect sound financial reasoning and accomplish goals that can put you in a better long-term position as a homeowner. However, if you are refinancing to access some or all of your equity (“cashing-out” is the industry’s term), exercise caution so you don’t risk losing the money in speculative investments or frivolous expenditures. If the real estate market turns against you and you have no equity remaining in your home, your property will be considered “underwater” which means your home no longer offers you any value.

Auto Loans

Most people don’t write a check when purchasing a car, they finance the transaction with a car loan. This is where you have several options. You can arrange financing through your own bank or credit union, or have the auto dealer arrange the financing for you.

If you choose to have the dealer work out the financing, you should make certain that you’re aware of the financing costs. Sometimes people are so enthusiastic about getting a new car they completely forget their financial obligations.

Car dealers have access to financing that may be more favorable than what you’re able to secure on your own. There are “0% financing” deals, but these offers may be restricted to those buying a specific model car or may only be for individuals with exceptionally high credit scores.

If you don’t qualify for this kind of an arrangement, your interest rate might be higher, and you may be faced with certain fees if you’re late with a payment.

For more information when it comes to personal loan options or debt relief programs, call 1-800-495-4069 today for a free, no obligation assessment with one of our experienced consultants.