- Budgeting
- Cash Management
- Consumer and Mortgage Loans
- Introduction
- Understand How Consumer Loans Can Keep You from Achieving Your Goals
- Explain the Characteristics and Costs of Consumer Loans
- Explain the Characteristics and Costs of Mortgage Loans
- Understand How to Select the Least Expensive Sources for Consumer Loans and How to Reduce the Costs of Borrowing
- Summary
- Assignments
- Debt and Debt Reduction
- Time Value of Money 1: Present and Future Value
- Time Value of Money 2: Inflation, Real Returns, Annuities, and Amortized Loans
- Insurance 1: Basics
- Insurance 2: Life Insurance
- Insurance 3: Health, Long-term Care, and Disability Insurance
- Insurance 4: Auto, Homeowners, and Liability Insurance
- The Home Decision
- The Auto Decision
- Family 1: Money and Marriage
- Family 2: Teaching Children Financial Responsibility
- Family 3: Financing Children’s Education and Missions
- Investments A: Key Lessons of Investing
- Investments B: Key Lessons of Investing
Special Types of Consumer Loans
There are a number of special types of consumer loans, loans that are different from traditional consumer loans. These include home equity loans, student loans, and automobile loans. These loans are discussed below.
Home Equity Loans: Home equity loans are also known as second mortgages. In a second mortgage, you use the equity in your house (i.e., the difference between what you paid for the house and what you could sell the house for today) to secure your loan.
The benefits of a home equity loan are that you can usually borrow up to 80 percent of the equity in your home, and the interest payments may be tax deductible. With this type of loan, you can also get a lower interest rate because the house is secure—it can’t be moved. One disadvantage of this type of loan is that it limits your future financial flexibility because you can have only one outstanding home equity loan at a time. Moreover, a home equity loan puts your home at risk; if you default on a home equity loan, you can lose not just your credit score but your home as well.
Home Equity Lines of Credit (HELOC): Home equity lines of credit are basically second mortgages that use the equity in your home to secure your loan. These are generally adjustable rate notes that have an interest-only payment, at least in the first few years of the note. Generally, interest rates are variable and payments cover only interest in the first few years. These have lower rates of interest than other consumer loans.
The benefit of these loans is that the interest may be tax deductible, reducing the cost of borrowing. The problem is that these loans will often keep people from making the hard financial choices to curb their spending. Why worry about spending when you can get a home equity loan or HELOC to pay it off? These loans sacrifice future financial flexibility and put your home at risk if you default.
Student Loans: Student loans have low, federally subsidized interest rates; these loans are often used to pay for higher education. Examples of student loans that are available to parents and students include federal-direct loans, plus-direct loans, Stafford loans, and Stafford-plus loans.
One benefit of student loans is that some have specific advantages, such as subsidized interest payments and lower interest rates. Also, you can defer payment of federal-direct loans and Stafford loans until six months after you graduate or discontinue full-time enrollment. The disadvantages of these loans are that there is a limit to how much you can borrow, and, like all debts, you must pay these loans back.
Automobile Loans: An automobile loan is a consumer loan that is secured by the automobile that the loan is paying for. This type of loan usually has a term of two to six years.
The advantage of an automobile loan is that it usually charges a lower interest rate than an unsecured loan. The disadvantage is you must make interest payments, and since vehicles depreciate quickly, you are often left with a vehicle that is worth less than what you owe on the loan you got to purchase the vehicle.
Payday Loan: Payday loans are short-term loans of one or two weeks; these loans are secured with a postdated check. The postdated check is held by the payday lender and cashed on the day specified. These loans charge very high interest rates—some payday loans charge more than 500 percent on an annual percentage rate basis (APR). I recommend that you avoid using these loans completely.
