Financial Litearcy - Smart borrowing
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personal loan
Loan products for big-ticket items

Cash-strapped consumers in the market for big-ticket items often turn to loans. But if you're already in debt, don't rush into anything.

This isn't the best economic environment to be relying on borrowed money, points out Greg McBride, Bankrate's senior financial analyst.

"This is a time to figure out how to live within your means and put aside money into a liquid cash cushion on a regular basis," he says. "That will reduce your need to borrow in a pinch."

Still, most consumers would be hard-pressed to use savings to pay for a home in cash. And mortgage lenders hawk loan products such as fixed-rate and adjustable-rate mortgages. Which one is a better choice?

Comparing
  1. Home equity loans vs. lines of credit
  2. Consolidation loans vs. credit cards
  3. 401(k) loans vs. personal loans
  4. 15-year vs. 30-year mortgages
  5. Adjustable-rate vs. fixed-rate
  6. FHA loans vs. conventional loans
And unfortunately, debts can add up quickly when an unexpected illness strikes. Consumers are often tempted to dip into their 401(k) accounts to pay the bills. Under these circumstances, is it better to take out a 401(k) loan or a personal loan?

U.S. consumers saddled with credit card debt often look to consolidation loans to get them out of a pickle. But does it make sense to substitute one form of debt for another?

We'll explore the pros and cons of some popular loan products to help take some of the guesswork out of borrowing money.

Home equity loans vs. lines of credit

Homeowners looking for cash sometimes tap their home equity -- the difference between the home's market value and its outstanding mortgage debt.

They generally opt for either a home equity loan or a home equity line of credit, known as a HELOC. Each has its merits and drawbacks. If your home value drops, you could end up owing more than your house is worth, as many borrowers and lenders have recently discovered. Further, equity lines of credit have variable interest rates, so your payments could potentially rise faster than your income.

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Home equity loans have fixed interest rates over the life of the loan and payments are steady from month to month. The borrower won't suddenly get socked with a huge increase in the monthly payment.

HELOCs work much like credit cards in that you draw from your line of credit and pay it down over time. Typical draw periods are 10 years to 15 years. The interest rate is variable and often tied to the prime rate.

Some HELOCs are structured so the borrower makes interest-only payments during the early part of the draw period. After the initial interest-only period, the loan becomes self-amortizing and the payments increase to cover the interest and the principal until the loan is paid off.

HELOC vs. loan
Home equity loanHELOC
Pros
  • Lower interest rate than credit cards.
  • Can be used for any purpose.
  • Interest may be tax-deductible.
  • Fixed interest and payments.
  • Lower interest rate than credit cards.
  • Can be used for any purpose.
  • Interest may be tax-deductible.
  • Offers a credit line similar to a credit card; you can draw cash as needs arise.
Cons
  • If home value declines, you could end up owing more than the house is worth.
  • You could lose home if you don't make payments.
  • Often has higher interest rates than HELOCs.
  • Lender may freeze credit line.
  • Access to large lines of credit can be risky.
  • You could lose home if you don't make payments.
  • If home value declines, you could end up owing more than the house is worth.
  • Interest rate is variable and could change drastically.

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MORTGAGE HOME EQUITY AUTO CDs CREDIT CARDS
Product Rate Change Last week
30 year fixed 4.19%  0.08 4.27%
15 year fixed 3.27% --0.00 3.27%
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30K FICO-based HELOC 4.38% --0.00 4.38%
50K FICO-based HELOC 4.11% --0.00 4.11%
100K FICO-based HELOC 3.96% --0.00 3.96%
 
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1 Year CD 0.90% --0.00 0.90%
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