Inspired Church leaders have urged Latter-day Saints to get out of debt and live within their means. We need to heed that counsel. In this section, we discussed the dangers of consumer loans and how these loans can keep you from achieving your goals. We also identified characteristics of specific types of consumer loans and learned how to calculate the costs of borrowing. Finally, we outlined the types of consumer loans according to their cost and discussed ways you can reduce the costs of borrowing.

Consumer loans are loans you obtain to pay for items that are fairly expensive; you usually don’t need these items (at least not urgently). Such items include electronics, automobiles, furniture, and recreational vehicles.

Consumer loans are very expensive and should rarely be used. They encourage you to buy now rather than to save for the future, a practice that may keep you from achieving more important long-term personal goals. Consumer loans also reduce the amount of money you can save for your goals because they require you to pay interest with money you might otherwise invest. Most importantly, consumer loans are almost always unnecessary, unless their purpose is to pay for an education or a home.

It is important for you to understand that different consumer loans have different characteristics—there isn’t just one type of consumer loan. Some of the characteristics discussed in this objective include single-payment and installment loans, secured and unsecured loans, variable-rate and fixed-rate loans, and convertible loans. Other types of consumer loans include home equity loans, student loans, automobile loans, and payday loans.

Mortgage loans are loans that are used to finance the purchase of a home or investment property. There are a number of different considerations you should make when deciding how to finance a home. Your choice of loans should be based on three key factors: (1) your time horizon: How long do you expect to have the mortgage, and how certain are you of that time horizon? (2) your preference (if any) for low required payments: How important are lower payments in the initial years of the loan? and (3) your tolerance for interest-rate risk: Are you willing to assume the interest-rate risk of the loan?

There are a number of different types of mortgage loans available. The options include fixed-rate mortgages (FRMs), variable- or adjustable-rate mortgages (ARMs), variable or fixed interest-only mortgages (IO), option adjustable-rate mortgages (Option ARMs), negative-amortization mortgages (NegAm), balloon mortgages, reverse mortgages, and special loans (FHA and VA).

There are four main ways to reduce your borrowing costs:

1. Understand the key relationships in borrowing.
2. Understand the key clauses for consumer loans and mortgage loans.
3. Know the steps to reduce borrowing costs.
4. Reduce the lender’s risk.

Now that you have completed this section, ask yourself the following questions:

1. Do I understand how consumer loans can keep me from achieving my goals?
2. Can I explain the characteristics of consumer loans and calculate the costs of borrowing?
3. Can I explain the characteristics of mortgage loans and calculate the costs of borrowing?
4. Do I understand how to select the least expensive sources of consumer loans and how to reduce the costs of borrowing?