Borrowing Money

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 Counseling Services (CCCS) professionals like ours advise reviewing all lending alternatives and carefully reading all documents.

Translating the Fine Print

Make sure you read and understand all the terms in the agreement, debt management experts advise. Does the lender require membership or charge 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, consumer credit counseling professionals 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, consumer credit counselors warn that a loan should be a last resort.

Consumer Credit Counseling Services Experts Explain Loan Options

If a loan is the best option for debt management, it is critical to select one appropriate for your personal situation. Our Consumer Credit Counseling Services (CCCS) 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 counseling professionals, because your home is pledged as collateral. The Federal Trade Commission has published a warning about scams on their website – http://www.ftc.gov/bcp/conline/pubs/homes/eqscams.htm

Home equity line of credit – A form of credit which differs slightly from a home equity loan in that it is open-ended revolving debt borrowed against the portion of a home's value that the borrower already owns. This form of credit is extremely high risk and could result in high interest rate payments. For more information, visit the Federal Reserve website at: http://www.federalreserve.gov/pubs/HomeLine

Payday loans – Short-term loans made against your next paycheck, with interest rates as high as 20% per week, and 250% annually. Missing a payment is deadly, requiring filing for an extension and triggering fees. In some states, these loans are illegal.

Term loans – Finance companies offer these with fixed high-interest rates that are similar to credit cards. They often require that you also purchase 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 – Read the fine print when applying for credit cards. Before signing up, you should know and understand the terms of a credit card agreement. Lines of credit might be limited, and may have high annual fees. "Secured cards" require deposits in low-yielding savings accounts. Secured cards can be used to build or re-establish credit, but make sure the issuing company is reputable and reports to a credit bureau.

Credit card consolidation – Balance transfers from one credit card to another, usually with lower rates advertised. If you have an existing balance, your monthly payments usually go toward that first (at higher rates). Introductory rates generally rise after a few months.

Reverse mortgages – Monthly payments you receive against your house's existing equity. Although the creditor is slowly buying your house, you do not have to pay back the loan as long as you stay. Receiving those regular monthly payments may be tempting, but debt management experts point out that once your home is purchased, you no longer own your most substantial asset.

An alternative to borrowing money is restructuring your budget. Before making any major consumer credit-related decisions, seek consumer credit counseling for a thorough analysis of your budget and financial options. The debt management experts at Consumer Credit Counseling Services (CCCS) agencies like ours are trained to educate consumers in how to make the most effective decisions to build good credit and manage debt.