Unsecured loans are often from relatives, friends, employers, or credit card companies. Examples of unsecured loans are credit cards and personal loans for debt consolidation, vacations, education and other things.
Credit unions, banks and thrifts offer different kinds of loans with varying interest rates. The government also offers unsecured loans for college. If you default on them, the lender can collect his money through our court system.
All financial institutions charge interest on the money they loan, and pay out interest to people who keep money in their accounts. Of course, in order to stay in business, they have to charge higher interest on the money they loan out than on the interest they pay for deposits.
Since credit unions are not-for-profit, their interest rates on loans are sometimes lower, and any profit is
often returned to their members in the form of higher dividends on savings or lower loan rates and low cost services.
Common sense tells you that when borrowing money for any purpose, you’ll want the lowest interest rate. Remember to include the fees charged you (also called finance charges) and any closing costs to figure the true cost of a loan.
When borrowing money to purchase a home, you may want to decide between paying “points” (a lump sum upfront) to get a lower rate of interest. Each point costs 1% of the mortgage amount, so the more points you pay, the lower your rate.
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To decide, you need to consider whether you can afford to pay for points now and the length of time you expect to have the mortgage.
The longer you plan to keep your mortgage, the more it makes sense to pay for points now because you’ll have a long time to benefit from the lower rate. Financial calculators can help you decide.
(See below).
What about zero-interest offers on car financing, home furnishings, appliances, electronics and credit cards? Before you get too giddy and sign on the bottom line, be sure to negotiate the best deal on the purchase price of your new car or truck (for example). Otherwise, you’re zero-interest financing a
higher price!
On credit cards, be sure to check whether zero percent interest is on balance transfers, purchases or both. Check the fees, too. While zero percent interest is enticing, there may be a hefty price to pay for each balance transfer.
Oh, and be sure to pay on time or you may find the zero percent interest deal pulled out from under you (and your new rug!) and replaced with a higher interest rate and late fees.
Bottom line: borrowing is easy – paying back the loans is not so easy, especially when you pay considerably more than you originally borrowed, thanks to interest.
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