Suze Orman warns against borrowing in this common situation
You might end up paying more than expected over time.
- Different loans have different features that come into play during your repayment period.
- You will need to be careful with loans with non-fixed interest rates.
There are different reasons why you might need to borrow money. Maybe you need your car repaired and you don’t have money in your savings account to pay for the repairs. Or maybe you want to renovate your house and need a loan to make it happen.
There are different loan products you can turn to when you need to borrow money. But financial expert Suze Orman warns borrowers to be very careful when borrowing money under a specific circumstance.
When you don’t get a fixed rate loan
Some loans, such as personal loans, have fixed interest rates. This means that if you sign a 6% loan, that 6% interest rate will apply to your debt until it is paid off. It also means that your monthly payments for this loan will remain the same over time.
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Variable rate loans work differently. And these are the ones Orman warns borrowers to avoid.
Credit cards, for example, tend to charge varying interest rates. So the rate you start paying on your debt could go up over time.
The same goes for home equity lines of credit, or HELOCs. HELOCs are often hailed as an affordable borrowing choice because lenders only take limited risk when issuing them (since they are based on the equity in an existing property). And, HELOCs can be very flexible. Once you have access to a line of credit, you usually have five to ten years to draw on it if needed.
But Orman warns that the problem with HELOCs is that their interest rates tend to reset every month. And so, while you might start paying 5% interest on a HELOC, eventually that 5% might escalate to 6%, 7%, 8% or more, leaving you with higher payments to manage. and causing you to spend more on interest than you expected.
A dangerous move right now
Although it is generally risky to take out a variable rate loan, at this time you should be extra careful. The reason? The Federal Reserve is implementing interest rate hikes in hopes of slowing the pace of inflation. This is likely to push consumer borrowing rates higher. And so, if you sign a HELOC, you could find yourself paying more and more interest on your debt as interest rates climb across the board.
In fact, if you’re looking to borrow against the equity in your home, a home equity loan is probably a better bet. This way, your interest rate won’t change over time, and it’ll be easier for you to factor your ongoing loan payments into your budget.
Plus, while borrowing by charging expenses to a credit card might seem like the easiest route to take, it might also turn out to be the most expensive. Not only are credit cards notorious for charging high interest rates, but their variable nature means you could really end up losing out. It is therefore a situation that is best avoided.
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