Friday, April 9, 2010

Debt Financing: Personal or Equity Loans?

Loan payment schedule of a 1-year, fixed-size ...Image via Wikipedia

For whatever reason, most of us at one time or another need cash. Personal loans are a great way to get money quickly.

Personal loans are (for the most) easy to obtain and require a minimum of verification including residence, income, and employment. However, personal loans also come with a higher interest rate than most other loans out there. In many causes you will be required to put up some asset you have collateral on your loan.

Equity in a home is excellent collateral. A home equity loan is only available to those who are buying or have paid off their home. You are borrowing money against the equity you have built up in your home. This loan method will likely allow you to borrow more money than a personal loan based on the dollar amount of equity you have in your home. Equity loans are available at a much lower rate than personal loans. The price for that comes with your home being attached to the loan.

For most people, it really isn’t a big deal because they already have a mortgage to pay each month. Adding on a longer term to repay that loan doesn’t bother them at all. However, if you don’t repay the funds, you may end up losing your home so make sure you take out home equity loans responsibly. In many cases, the interest portion of a home equity loan can be deducted on your Federal income tax. This is not possible with personal loans.

If you have to make a choice between a personal loan and a home equity loan, there are many things you will want to consider. First, decide exactly what the loan is to be used for and the dollar amount you need. Most personal loans won’t exceed $25,000 so if you need more than that you will have to secure more than one personal loan or look at the home equity loan option. Next, take a realistic look at your credit. Personal loans are easier to get with poor credit than home equity loans are.

Take the time to research your options and know what is available and the total cost of that loan to you. The best way to do is by taking a look at the Annual Percentage Rate, known as APR. Lenders must show not only the loan interest rate associated with APR, but all the fees of the loan. This means everything you will be charged for in the loan you choose will be listed and itemized for you to review.

This is a great method for comparing different types of loans. For example, home equity loans generally have lower interest rates so you would assume that is a better option than a personal loan. However, the additional fees required to secure that home equity loan may cost you more than the additional interest you will pay over the life of the personal loan.

Personal loans are quick and efficient, but they may not always be the best loan for your particular situation. You should discuss your loan options with the lender you intend to use. It is also important that you conduct your own research on various types of loans you may be eligible for. This will assist you in making informed decisions while ensuring you get the best loan available.

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