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Home-Equity Loans
Consider carefully before taking out a home equity loan. Although this type of loan
might let you take tax deductions that you could not take with other types of loans,
they reduce the equity you have built up in your house. If you are unable to make
payments, you could lose your home.
Home equity loans can either be a revolving line of credit or a one-time, closed-end
loan. Revolving credit lets you choose when and how often to borrow against the equity in
your home. In a closed-end loan, you receive a lump sum 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.
See the Housing section for helpful information about buying, leasing, renting or
repairing a home.
Installment Loans
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
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! Payday loans are illegal in some states.
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. 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.
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