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It's sink or swim for borrowers
Try not to get caught in a shark feeding frenzy as you look for an escape to safety.
Out of the red and into the black

Borrowing options that offer a lifeline

When you're swimming in a sea of debt, you're constantly looking for a lifeline. This is the time to keep a cool head and make sure that whatever you latch on to will buoy you to safety and not tie you down with dead weight.

Just be careful who heeds your SOS. A loan may help get you by, but you'll want to borrow money at the best rates, according to terms that suit your needs -- and steer clear of bad deals as well as those that look too good to be true. When you're in financial trouble, predators smell opportunity.

"You need money, you feel desperate, you're scared and there are lots of people who know that and try to take advantage," says New York Law School professor and debt expert Karen Gross.

According to Gross, there are two lines to keep in mind:

  • The smaller the print, the bigger the hint. This means make sure you understand the fine print, because if it's in small print, it's probably anti-consumer.
  • If it's on the back, it gives you a whack. This ditty remind us that the stuff that stores and lenders want you to see is front and center and looks pretty good in big, bold print. The back contains terms and conditions that you really want to pay attention to.

Before you take on new debt, it's a good idea to take a look at your credit report and make any corrections. Gross says this is of particular importance for people already in debt. Watch related video

Will it buoy or sink you?
Option Pros Cons Tip
Balance transfers Lower interest rate Often involve fees; may need to apply for new credit. Watch out for bait-and switch tactics. See balance transfer trip-ups. If you're in debt already, use transfers to pay down existing debt, not to fund new purchases.
Home equity Convenient; lower interest rate; interest may be tax deductible Increases the amount owed on the house; many borrowers run debt up again; puts house at risk when used as collateral Only borrow what you absolutely need and only if you have a lot of equity.
Borrow from family or friends Lower or no interest; flexible terms Risks an important relationship Use a contract; find one online or at the office supply store to use as a template, or set up official loan arrangements through a firm such as Virgin Money.
Peer-to-peer lending Interest rate may be lower Make sure to apply the funds to your existing debt; otherwise, you're just racking up more debt. Several online social networking sites act as middlemen between lenders and borrowers. Be sure to understand how they work as well as loan terms and fees before signing up.
Borrow from your 401(k) Good interest rate May be required to pay taxes and penalties on amount borrowed if the loan isn't repaid within five years; may be required to pay back the loan in full if you lose job; less money will be compounding for retirement Avoid this at all costs since it puts your retirement plans in peril. An exception might be if you're way ahead of your retirement savings goal and you find yourself in dire straits.
-- Posted: March 17, 2008
 
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Compare Rates
NATIONAL OVERNIGHT AVERAGES
$30K HELOC 4.29%
Personal loan 12.73%
$30K Home equity loan 5.10%
Rates may include points
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