Essential guide to loans, credit lines and borrowing money
Sept. 20, 2023
3 min read
What we'll cover
The basics of borrowing money
Your options for borrowing
Considerations when getting a loan
Borrowing money is a common and often necessary aspect of personal finance, whether you're considering a mortgage, a car loan or exploring credit card options. Knowing the ins and outs of borrowing is crucial for making sound financial decisions.
Here are a few key points to note when it comes to borrowing money:
In the world of borrowing money, understanding mortgage options and various types of loans, including their annual percentage rates (APR) is essential for individuals seeking financial flexibility and stability. Mortgages come in different forms, such as fixed-rate and adjustable-rate mortgages.
As far as debt goes, mortgage loans are considered to be in the “good" debt category because you're building equity in a sizable asset that is historically likely to appreciate over time.
At the most basic level, auto loans function similarly to home loans: A borrower is provided with the necessary funds upfront, which they can repay over time with interest. The loan amount is determined by the market value of the vehicle but the interest rate is determined based mostly on the borrower's creditworthiness, so your loan options will differ as well. You may be able to get a loan from a bank or a credit union, but you can also apply for financing through the dealership itself. When you apply through the dealership, you sign a contract to a third party finance source, like Ally. You then make your payments to the finance source until the contract is paid in full. Some dealers may offer exclusive financing deals from the manufacturer or something geared toward consumers with less-than-perfect credit.
Auto financing generally ranges from 12 months to 96 months for a new car purchase. If you're purchasing a used car, you can expect a shorter term.
Managing credit lines
Credit cards are widely used financial tools that allow consumers to make purchases on credit. When you use a credit card, you are essentially borrowing money from the card issuer to pay for goods and services. Each card comes with a credit limit, which represents a maximum amount you can borrow at any given time. The card issuer charges interest on the outstanding balance if not paid in full by the due date. Credit cards may offer convenience and flexibility in managing expenses, and they often come with various rewards and benefits.
It's important to remember to use credit cards responsibly to avoid accumulating excessive debt and to maintain a positive credit rating. Aim to always pay off your credit card on time, so you're not hit with high interest or penalty charges.
Higher education comes with a hefty price tag and taking out student loans as a means to manage these expenses is increasingly common. Know that federal loans that offer fixed interest rates might be more cost-effective over time than private loans. Additionally, repayment begins upon graduation, leaving school, or becoming less than a half-time student.