Unless you are one of the world’s richest people, chances are you will wish that you had more money. More cash to spend doing up your home, heading off on the vacation of a lifetime or purchasing the car of your dreams.
It’s this desire for more money that makes consumer borrowing in the United States such a big deal. Americans owe an estimated $13 trillion, built up through loans and credit cards among other money-lending schemes with an additional $14 trillion in mortgage-related borrowing.
Most of us will have to borrow money at some point in our lives, whether it’s to buy a house or for an unexpected emergency. When that time comes, the question is which is the best option for borrowing? There will be a different answer for each different case, depending on your current financial situation, how much you want to borrow and how quickly you need to access it.
In order to try and help you decide which method is the right one for you, we’ve put together this list of four credit options with the pros and cons of each.
According to data from Gallup, 71 percent of Americans have a credit card, and the average number of cards owned by this group is 3.7. That’s a lot of credit cards, which makes them the nation’s most popular way of borrowing.
When you take out a credit card, you are effectively being given a card with access to a set amount of money belonging to a bank or lender. You’ll then be expected to make a monthly repayment on what you’ve spent – with interest – until your debts are cleared.
Pros: Most credit card companies operate a grace period, and if that is the case, federal law states it has to be for a minimum of 21 days. That means that you have three weeks from receiving your bill until you need to make that month’s minimum payment. If you can pay the money back in full before the repayment date, you generally won’t pay any interest on it and because you can spend up to a specific limit without needing to apply for access to cash each time you need to make a purchase, it’s readily available money the instant you need it.
Cons: Late or missed payments may result in higher fees and a lot more interest to pay. Unpaid balances can therefore easily spiral out of control if you’re unable to keep a check on them.
A personal loan is taken out by you, the person, and as such is not guaranteed against any collateral such as a house or a car. Loans are provided mainly by banks and are often used for investments that will be beneficial over a long period of time, such as purchasing a vehicle or carrying out house renovations or consolidating existing debt.
To secure a personal loan, you apply to a bank or financial institute who will then carry out a credit check to ensure that you are likely to be able to afford the repayments. If they are satisfied, then you can have access to a vast sum of money. Some companies now even offer small personal loans without the need for a credit check, which this article explains more about.
Pros: The repayment on a personal loan comes from a fixed monthly payment, which can be extremely helpful for budgeting as you will always know how much to set aside. The interest rates are generally lower than on a credit card, which is why they are popular for paying off credit card debt, and they can be used for many different purposes.
Cons: It can be difficult to get approval for a personal loan. If your credit rating isn’t great, then the interest that you pay on a loan can go from a single figure digit to as high as 30 percent.
A mortgage is a special type of loan which is taken out in order to fund the purchasing of a home. When you buy a house, you make a down payment and then borrow the amount left to pay for the property from a bank or lending institute. The average down payment made has hovered around the 6 percent mark over the last few years.
Repayment is made as a set monthly payment spread over the length of the loan, which can go on for many years. These repayments are usually small and manageable, while you will also pay interest on the money borrowed to fund the house purchase.
Pros: Interest rates for mortgages are among the lowest on any type of borrowing. Other than paying cash in full, a mortgage loan is the best way to become a homeowner.
Cons: Because of the amount of money you are borrowing and the complexity of the loan, the approval process can often take months. The house becomes your collateral, so if you fall behind on payments you could end up in danger of losing your home, and although the repayments are small, you can be making them for decades to come.
Payday advances are becoming an increasingly popular means of accessing money quickly. Over 12 million Americans take out payday loans each year with their eye-watering interest rates returning $9 billion in fees for the lenders.
These are short-term, high-interest loans that are normally used in an emergency to cover you until your next payday. Borrowers will effectively give you a cheque for a certain amount and then expect repayment plus fees next time you are paid.
Pros: You won’t need to undergo a credit check for a payday advance. They provide the quickest and easiest access to cash and are available to virtually anyone, often with only a few basic questions asked.
Cons: They have massive interest rates, sometimes running into three figures which can be hugely damaging unless they are paid off almost immediately. They are also open to abuse with a number of unreputable lenders out there looking to take advantage of some of the most vulnerable.