Which Financing Option is Right for You?


You have a financial need and no ready funds to spare. Using a credit card may be your first thought — but is it really the best choice?



Maybe your car is on its last leg, your daughter is getting married or it’s time to remodel that downstairs bathroom. Before you pull out the credit card or tap into your home’s equity, take a moment to truly understand the different financing options available. Then decide which one is best suited to your specific need. Following are three of the most common choices to consider.

Credit Cards

There’s no doubt — they’re convenient. If you have a card with the necessary available credit, there’s no need for an application and you can act fast. However, credit cards tend to have higher interest rates versus other kinds of borrowing.

Typically, card interest rates are not fixed, and if yours rises, you could wind up paying more than you planned as you pay down the balance. But the interest only begins to accrue after a set grace period. If you can pay off your purchase within that time period, your borrowing would essentially be interest-free.*

Some cards, such as Rabobank’s, also offer extra benefits, including travel insurance, warranty protection and rewards points.

Best for: Smaller purchases that you can pay off quickly, such as electronics; or expenses like vacations that make sense due to special card perks.

Home Equity Loans and Lines of Credit

Both home equity loans and home equity lines of credit allow you to borrow against the equity in your home. (In a nutshell, equity is the difference between what your home is worth and what you owe on it.) Interest rates are often lower than with other financing and may offer tax deductions (consult your tax advisor for details).

A home equity loan is a one-time, lump-sum advance with a fixed interest rate and the same payments every month. These loans work best when you know exactly how much you need to finance.

With a revolving home equity line of credit, you can withdraw funds as needed, up to a set amount, at a variable interest rate and payment. This alternative is valuable when you anticipate taking out varying amounts over time.

Best for: Major remodeling projects that could boost your property’s value, education funding, large debt consolidation and other significant expenses that would take you more than three years to pay off.

Personal Loans and Lines of Credit

Like home equity financing, the differences between personal loans and personal lines of credit come down to whether you want a fixed-rate, one-time loan or a flexible, variable-rate credit line. But unlike home equity options, personal loans and lines are not tied to your home. Instead, they’re either unsecured, or secured by other collateral, such as investments. Either way, terms are traditionally between two and five years.

Best for: Purchases of more than $1,000 that will take you more than one year, but less than five years, to pay off — such as a swimming pool, a wedding or medical expenses.

Still not sure? Your local Rabobanker can answer your questions and help you get the perfect-match financing for your situation. And remember, when you’re ready to get started, it’s fast and easy for existing customers like you to apply online!

* Credit card fees and terms vary; always check with your card provider for complete details.

Sources:

  1. “Home Equity Loan vs. Line of Credit,” Bankrate.com, http://www.bankrate.com/finance/debt/home-equity-loan-vs-line-of-credit-1.aspx#ixzz3RqXitILz, accessed Feb. 15, 2015
  2. “Personal Loans vs. Credit Cards: When to Use a Loan Instead of Plastic,” by David Weliver, MoneyUnder30.com, posted March 1, 2014, http://www.moneyunder30.com/personal-loans-vs-credit-cards#SAGiYtYm6CZrAOjh.99, accessed Feb. 15, 2015
  3. “How Credit Cards Impact Your Credit Score,” by Tamara E. Holmes, CreditCards.com, posted Oct. 22, 2014, http://www.creditcards.com/credit-card-news/how-credit-cards-impact-credit-score-1270.php, accessed Feb. 15, 2015




The information contained in this article is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.