In the financial downfall of 2020, many people are trying to make ends meet. Between being laid off and waiting months to receive unemployment checks, many may be tempted to take out a loan to cover the cost of their monthly expenses. Before you make any rash decisions, here are four tips for using loans and equity responsibly.
Home Equity Can Be A Tap for Emergency Funds
If you’re not receiving a monthly income, you’re likely under a lot of stress. While your initial reaction may be to charge your monthly expenses to a credit card, that’s not the best option. Start by talking with your service providers to see if they offer any hardship programs. Many mortgage lenders will allow for forbearance periods where you won’t be responsible for a payment for a set period of time. If there is no option to do this, consider tapping into your home’s equity through a HELOC to get access to the emergency cash you need.
Ensure A Payment You Can Handle
When you’re in dire need of cash, it can be easy to consider committing to a payment that doesn’t fit into your budget. You may rationalize the payment by assuming that you can make more money in the future. The truth is that you shouldn’t take on any payment that you can’t afford in your normal budget. If it’s not feasible, look for another option.
Consider What Equity You Have
As you grow throughout life and establish yourself financially, you’ll find that you will acquire different forms of equity. This may be home equity, vehicle equity, or retirement equity. When you’re in need of cash, you can tap these sources of equity. Most lenders will offer you a loan for the amount of equity that you have or a little less. Then, you simply repay the lender over a fixed period of time.
Be Mindful of Interest Rates
Interest rates are a big determining factor in how much you pay monthly and the amount of money you pay to borrow the funds. You want to ensure that the interest rate you are offered by a lender is competitive. Typically, credit cards have a higher interest rate than HELOCs or auto loans. Therefore, it makes sense to tap these forms of equity over using credit cards for expenses.
Understanding how loans and equity work can make a big difference in your financial future. It’s only once you truly get these financial tools that you can start to employ them in a fashion that works best for your lifestyle. The above four tips should get you started on your way to effectively using equity and loans.