Loans

Loan Advice

Loans are either secured or unsecured.

A mortgage is a secured loan, but here I am referring to such things as an auto loan or a margin loan from your stockbroker. The lender keeps title to the property or otherwise controls it until the debt is paid.

Popular unsecured loans are student loans, payday loans and personal loans from banks or finance companies.

Secured loans carry lower rates because the lender has something to fall back on if you default. Margin loans carry some of the lowest interest rates available, but your stockbroker will be quick to liquidate your assets, if their value falls under the margin limits and you can’t meet the margin call.

The amount you will pay for auto loans, home improvement loans and other personal loans depends on your credit score and where you go to borrow.

If you have a great credit score and borrow from a bank, you interest rate will be a lot lower than if you borrow from a finance company, an auto dealer or a home improvement contractor.

When you buy a new car, unless the auto manufacturer is offering low or no interest loans as a sales incentive (don’t forget not to overpay for the car), a bank will usually offer you a better deal. This is also true for used car loans.

Payday loans, tax refund advances and other similar short term small loans carry the highest interest of all. If you use this type of credit, be aware that the true cost is quite high.

Banks and credit card companies also offer unsecured lines of credit. Instead of a piece of plastic, they give you a check book. You probably realize that the fees that you pay when you write one of these checks (and this usually applies to the checks you get with your credit card account as well) raise the nominal interest rate.

You usually pay 2% - 3% of the amount of the check, up to a limit which can be as high as $100. Also there is no grace period and interest starts running from the day the check clears.

If you need a personal loan go to a bank first, especially if you’re already a customer. You’re likely to get the best deal that way. Get a loan for a fixed amount and a fixed term so that you don’t have the temptation a line of credit will provide. You should expect to pay more than a mortgage, but less than a credit card.

Unsecured personal loans are falling out of favor. Banks would rather see you open a credit card account. But they are useful in many situations and are easier to control than open ended lines of credit.

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