Aside from first mortgages (see ”How to Get the Right Mortgage,” Money, July 1986), they include home-equity lines of credit, margin accounts and automobile loans
(MONEY Magazine) The charge to borrowers these days: learn about lenders and what they have to offer. By doing a thorough credit check of your own, you are more likely to borrow on your own terms. To be sure, the rates on loans are low, and the range of offerings is wide. But how do you know which is the best place to go for a loan and which one to choose once you get there? Your purpose for borrowing, the amount you need, your ability to repay and your creditworthiness will dictate whom you can borrow from and the type of loan you get. Let’s say you need a loan to help pay for your daughter’s tuition at Pricey U. You head to Old Faithful Savings Loan downtown to apply for a Guaranteed Student Loan, but your family income is too high to qualify. The banker suggests a home-equity line. Unlike other college borrowing, all the interest is tax deductible. ”Great,” you say. The terms: a variable rate pegged at three percentage points over prime and closing costs amounting to 1.25% of the loan. Not so great. By scouting around you can do much better (see the home-equity loan table on page 172). And so it goes.
All loans fall into two broad categories, secured or unsecured. Secured loans use an item, commonly your home or car, as collateral. Unsecured debt includes personal loans, lines of credit and credit cards, and tend to carry higher interest rates. (For a detailed look at the most popular types of loans, see ”Four Credit Genies” on page 164.) Here’s a guide to help you pick the right loan for your purposes:
You can get more predictable payments, but at higher rates, with a second mortgage or a secured home improvement loan
Home renovation No matter who your lender is, the most popular loan these days is a home- equity line of credit. Reason: unlike interest on debt that does not use your home or second home as collateral, interest on home-backed debt is almost always fully deductible up to the price you paid plus improvements. And with your house securing the line of credit, the interest rates on these medium-to- long-term (seven to 20 years) variable-rate loans are among the lowest around; rates are usually one to two percentage points over the prime rate, currently 7. Also, you pay interest only on the amount you actually draw down. But there are potential problems. Fall behind on your payments and you could lose your house. If inflation and interest rates revive, you could find yourself facing far heavier payments than you ever imagined.
Few lenders have the caps on how high the variable interest rates can go. Payments on a seven- year, $40,000 loan at 9. If the prime returned to its 1981 high of 18. Seconds differ from home-equity lines of credit in that you usually borrow a fixed amount at a fixed rate for a fixed term. Interest charges are now about 11% to 12%; the typical term is 10 to 15 years. With home improvement loans you must submit a contractor’s estimate and plans and then prove to the lender that the improvements were done. The lender puts a so-called junior lien on your home; he can claim his money if you default and the house is sold, but he cannot foreclose.