What Type of Loan Should You Get?
No matter what, stay away from debt consolidation companies — you know, the ones you see on TV promising to reduce your monthly payments even if you have bad credit. “With finance companies you’ll pay as much as 23% in interest and probably hurt your credit rating,” says Gerri Detweiler, author of “The Ultimate Credit Handbook.” Furthermore, they will charge you application and handling fees you wouldn’t have to pay otherwise.
If your debt is only tied up in credit cards, then a much better option is to simply roll over your credit card debt to a card with a lower interest rate.
But if you’re looking to consolidate different types of loans or if you’re looking for cheaper rates than those offered by credit card companies, check to see if you qualify for a personal loan from your bank or credit union. A credit union is likely to charge 10% to 13% for a loan, according to Bank Rate Monitor. These loans can be secured (backed by something you own) or unsecured, but with unsecured loans “it’s going to be difficult to qualify,” warns Detweiler.
If you’re a homeowner, then consider a home equity loan. The interest on these loans is tax deductible, as long as your loan doesn’t exceed the value of your house. Bank Rate Monitor provides national averages as well as the best rates by state. Just bear in mind, if you default on your loan, you risk losing what is most likely your most valuable asset.
Another option is to tap your 401(k). Most employers will allow you to borrow up to $50,000. You’ll owe interest, but you pay it right back into your own account. There are two downsides, however. First, you will be replacing pre-tax dollars with after-tax dollars. Ouch. Second, if you leave your employer, you will probably have to repay your loan — pronto.
Finally, you could consider borrowing on margin from your broker. In this case, your brokerage account assets act as collateral. Rates can be low, say 7% to 8%, but if the value of your investments fall, you may be called upon to put up more cash.