Do you know the ins and outs of how to borrow money? Financial advisors say that fewer than one-third of adults can accurately describe the various types of debt that most people encounter during their lives. Whether that pertains to purchasing a car, paying for college, buying a house or something else, many people simply don’t know the basic set-up of traditional lending arrangements.
Here are the facts about the five most common ways people borrow money. See how many you can describe before reading the details. If you hit the bull’s eye on all five, you’re more knowledgeable than 95 percent of U.S. adults. If you’re well-acquainted with three or four of the borrowing methods, you’re still in the top third of the pack.
Auto Financing
Auto loans typically are financed by major banks or lending institutions, feature payback periods of 2-6 years, have rates set according to the borrowers’ creditworthiness and require a down payment of varying amounts. Experts say the best way to approach the purchase of a new car is to put as much money down as possible, use a trade-in to get direct credit against the purchase price and negotiate off the lowest interest rate you can get.
Student Loans
Student debt comes in many varieties. Government-backed options feature low interest rates and long payback periods. Private student loans offer a wide variety of repayment systems, payback periods, and interest rates. Sometimes, when students reach the maximum on their federal borrowing for school, they turn to private lenders for higher amounts and generally good terms.
Mortgages
Unless you buy a house for cash, you’ll need to use the home as collateral to pay for it. These contracts with banks are called mortgages and typically last for between 10 and 30 years, carry interest rates based on the market and the borrower’s credit scores, and require down payments of about five percent in most cases. There are infinite varieties of mortgage arrangements. Experts advise home-buyers to get their credit scores up before applying and to put as much down as possible. Because mortgages are very long-term affairs, even a small change in rates can make a huge difference in the total amount paid for a home.
Personal Loans
Personal loans are one of the most common ways to borrow money. Most of these arrangements come with rates based on credit scores of borrowers and carry a wide variety of payback periods. Consumers can use utilize resources like this site here for financing vacations, business expansion, education expenses, or perhaps to remodel their home. The marketplace is quite diverse when it comes to this kind of lending. Experts say that borrowers should comparison shop and work with trustworthy lenders when searching for a credit.
Credit Cards
If you have plastic in your wallet or purse, you probably already know how credit cards work. Most cardholders have a fixed maximum amount they can borrow against, make monthly payments on the balance and are subject to interest on any amount that carries over from month to month. Late fees, annual charges and other add-ons can up the price of this kind of borrowing.
