Daily spending needs are commonly covered by cash on hand, creating a tangible relationship between the things you buy and the money leaving your fingertips. In some ways, paying as you go represents an ideal money management strategy. If the money isn’t in your pocket, the purchase must simply be delayed, until such time as you can cover the cost with cold, hard currency.
As appealing as it may be, never going into debt beyond the money in your pocket isn’t a realistic long-term financial approach. In practice, various forms of financing are commonly utilized, funding insignificant purchases, as well as monumental financial commitments. Familiarity with wide-ranging borrowing alternatives is essential to financial success, ensuring you don’t overpay for the privilege or take-on unmanageable debt.
Borrowing Options Match Financing Needs
As you take-on loans and other financial obligations, it’s important to use cost-effective alternatives to meet your needs. A few common funding sources include these credit options:
Credit Cards – Credit convenience has altered the way people pay for items at the store. Cards are used for everything from gasoline to groceries, resulting in revolving balances for users unable to maintain spending discipline. Occasional credit card use makes financial sense, especially when the outstanding balance is paid-off each month. Running-up unmanageable debt, on the other hand, represents one of the most expensive ways to utilize credit. With APRs in the double-digits, credit card interest payments are among the highest, when compared to other forms of funding.
Friends and Family Loans– Perhaps one of the most forgiving credit arrangements available, borrowing money from friends and family provides money you need, without strict oversite from a traditional lender. Despite the somewhat casual nature of a person-to-person loan, terms should be drawn-up between parties involved, outlining repayment terms and designating the amount of the loan. Payment dates, penalties and information about the borrower should be included, in case an unanticipated problem arises during payback. Depending upon your relationship with the lender and terms to which you agree; interest payments can also be included in the contract.
Short-Term Loans– Borrowers faced with credit problems have access to fewer funding options than those with sturdy references. When your credit history interferes with conventional financing, shop online for alternatives, which may be available without a formal credit check. Lenders command a premium for short-term, unsecured financing, so payday loans and other quick-cash options are not well-suited for long-term payback. Still, these bridge loans assist with fast funding, when it is most needed. As long as you repay them according to terms, short-term loans can be useful, without negative effects
Equity Financing– If you own a home, it may be possible to borrow against the equity held there. Equity loans and lines of credit furnish affordable funding, because they are secured by the value of your property. With lower risk and tangible collateral, lenders are able to offer favorable interest rates for well-qualified applicants. Each loan is structured according to individual lender terms, but many home equity lines of credit are approved for draws during a ten year period. After this initial phase of credit, borrowers typically have 30 years to repay outstanding balances. Equity financing is offered with fixed rates, at times, but you may also benefit from variable rates. If prevailing interest rates are low at the time of borrowing and you intend to quickly repay the money you borrow, an introductory variable rate may present the most cost-effective financing alternative.
Personal Loan – While mortgages and other forms of financing target specific spending functions, personal loans are granted for general use, making them ideal for those needing flexible financing. Because the loans are unsecured, interest rates are higher than equity loans and other secured options. And personal loans generally call for credit checks, so you’ll need a solid credit score to secure the best terms.
Various forms of financing assist purchases, ranging from everyday credit card spending to long-term mortgage commitments. Each type of funding serves particular needs, so the more you know about credit and lending, the better prepared you are to settle on the most cost-effective financing. Explore these 5 types of funding to meet your credit needs.