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 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.

Please see the Housing section for helpful information about buying, leasing, renting or repairing a home.

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.