Most purchases are no major problem to negotiate for most people. However, there are some big purchases that require people to borrow money through the use of different types of loans. These purchases include, but are not limited to, homes, college educations, and automobiles. Furthermore, there are situations in life when borrowing money – even if it’s a relatively small amount – is the only option for buying essential goods and services.
Here is an overview of popular loans and a brief explanation of how they’re tailored to facilitate certain types of purchases:
The most popular home mortgages that personal finance gurus recommend are the 30-year fixed rate mortgage and the 15-year fixed rate mortgage. The latter comes with a lower interest rate and a lower interest payout overall. These loans are in many ways a forced savings account. You are buying an asset that generally does a reasonably good job of maintaining or increasing its value over time. Each dollar of principal that you pay off effectively increases your net worth. This is not the case with the other loans mentioned. Interest rates on mortgages are generally low for borrowers with good credit.
Another benefit that home mortgages provide is tied to federal taxes. Mortgage interest expenses are deductible when borrowers itemize their federal tax returns. The lower interest rates for mortgages are partially available because the home itself serves as the collateral for the loan. If you don’t pay, the lender will seize the property.
Rather than be for a specific type of purchase, personal loans can be used for whatever the borrower chooses to buy with the money. This wide range of spending freedom usually means the application process is stringent, often requiring the borrower have an immaculate credit score. Lenders willing to do business with borrowers lacking a strong credit history will attach stricter repayment terms onto the personal loan, therefore it’s crucial to do your research when searching for where to find a quick cash loan online.
Regardless of where the personal loan comes from, it’s imperative for borrowers to do their own cost-benefit analysis before finalizing their loan agreement; the use of the loan must not end up leading to a worse-off financial situation for the individual but rather help contribute to improved personal finances. For instance, using a loan to fix a car to get to work would be a net gain, whereas using the loan to fund a vacation will likely prove to be a net loss.
Auto financing generally comes with an interest rate that’s a little higher than a mortgage, although it’s possible to find special financing that is lower at times. Loans for new cars now generally range between 48 and 84 months although other terms are possible.
The major difference between a mortgage and a car loan is related to the fact that cars are assets that depreciate, while housing tends to maintain its value or appreciate over time. Buying a car with borrowed money does not serve to increase your net worth. As is the case with a mortgage, the car itself serves as the security for the loan, so you’re at risk of losing it if you cannot pay the loan back in a timely fashion.
Another type of loan that’s common for big purchases is the student loan. These types of loans are riskier for lenders. There is nothing backing a student loan. The interest rates can vary widely. Some subsidized loans can be quite affordable, depending upon the amount that’s borrowed. Private student loans, on the other hand, can have interest rates that are quite usurious.
Student loans are taken out to improve a person’s employment prospects in the future, so there is more risk for the borrower, as well. There is no collateral to back up these loans, so the government does not permit student borrowers to discharge this type of debt in bankruptcy. Additionally, those who have trouble paying their student loans and choose to go into forbearance will see their debt grow while they make no payments. In this instance, compound interest will work against the borrower.
Borrowing for large purchases is frequently a necessity. Few people can save up $250,000 for a home, and buying will frequently cost less than renting. Additionally, every year that a college student delays graduation is likely a year with lower pay.
Even though some debt can be advantageous over time, borrowers should be sure to make their payments in a timely fashion and borrow no more than they can reasonably expect to pay. Failure to pay can affect a person’s ability to borrow in the future, and those who can qualify for loans will have higher interest rates.