by Lauren Rosales-Shepard, Content Writer
You’re pondering a major expense. Perhaps you’re tired of your cramped galley kitchen, and want to expand the space into a more open floor plan (complete with one of those lovely quartz countertop islands!). Maybe you’ve seen a commercial space for rent and know it would be the perfect place for the coffeeshop and bakery that your neighborhood so desperately needs. Or, you think it’s time to consolidate your various debts into a single, more manageable monthly payment. Whatever the reason, you know that you will require a larger sum of money than your savings alone can provide. You’ve heard that home equity has reached record highs for Americans, and you know that there are a myriad of ways to access it. Maybe, you think, this might be the best route to take to obtain the funds you need.
But let’s make sure you cover all your bases. What are the alternatives to tapping into your home equity to cover a big expense? Over the next several days, tune in to this series of shorter blog posts that delve into some of your options. Today: Personal Loans and Credit Cards.
Firstly, there are two different types of personal loans: secured and unsecured. A secured personal loan requires that you utilize something as collateral, something that the lender can keep to satisfy your debt if you should default. The collateral can sometimes be a large asset, like a car or a boat, or a cash asset, such as a savings account. An unsecured loan is precisely what it sounds like–a loan that is not secured by any kind of collateral. Due to that lack of collateral, unsecured loans are often considered as more risky for the lender, and therefore the interest rates may be higher to compensate them for that risk.
You can apply for a personal loan from a bank, credit union, or online lender. The lender reviews your application, and, if they approve, will offer terms. Once you accept the terms–the length of the loan and the interest rate, for example–the funds will be yours to use however you see fit. Then, you will make monthly payments comprised of a portion of the amount borrowed, as well as interest, until the loan is paid off.
Some personal loans require you to cover additional fees, like a credit check fee or a loan origination fee. Plus, if you want to pay off the loan early, some loans may charge a penalty fee. It’s important to research the specifics when you’re shopping for any kind of loan, and a personal loan is no different!
When you charge purchases to a credit card, you are meant to repay the balance you borrowed to make those purchases. For whatever portion you do not repay within a certain term–usually, a month–interest is added to that which you owe. Sometimes, when you open a new credit account, there may be a special promotional 0% APR for a set amount of time (often, a year), in which case, interest would not be added.
Most major credit cards (i.e. Visa, Mastercard, American Express, Discover, etc.) are available through banks and other financial institutions. Besides acting as a credit line, many cards will also offer certain benefits or rewards, like airline miles, hotel rooms, or cash back on certain purchases. Some stores or retailers will offer a co-branded credit card–for example, Amazon’s Visa or Barnes and Nobles Mastercard. Such cards can include benefits that correspond to the store, or offer extra points when used there that will eventually pay off in rewards.
Credit cards are ultra-convenient, but if you can’t make the payments, the interest can really add up. Plus, if you find yourself unable to make the minimum payments on time, you can damage your credit score.
Continue to Part II.
The content on this page provides general consumer information. It is not legal or financial advice. Unison has provided these links for your convenience, but does not endorse and is not responsible for the content, links, privacy policy, or security policy of the other websites.
You’re pondering a major expense. Perhaps you’re tired of your cramped galley kitchen, and want to expand the space into a more open floor plan (complete with one of those lovely quartz countertop islands!). Maybe you’ve seen a commercial space for rent and know it would be the perfect place for the coffeeshop and bakery that your neighborhood so desperately needs. Or, you think it’s time to consolidate your various debts into a single, more manageable monthly payment. Whatever the reason, you know that you will require a larger sum of money than your savings alone can provide. You’ve heard that home equity has reached record highs for Americans, and you know that there are a myriad of ways to access it. Maybe, you think, this might be the best route to take to obtain the funds you need.
But let’s make sure you cover all your bases. What are the alternatives to tapping into your home equity to cover a big expense? Over the next several days, tune in to this series of shorter blog posts that delve into some of your options. Today: Personal Loans and Credit Cards.
Personal Loan
A personal loan enables you to borrow a lump sum of money to pay for a large expense, or variety of expenses. Unlike some other types of loans, a personal loan tends not to dictate what purpose the borrower uses it to fund (i.e. a student loan is specifically for college or graduate school). In most cases, the borrower repays the loan in regular monthly payments, with interest.How do personal loans work?
Firstly, there are two different types of personal loans: secured and unsecured. A secured personal loan requires that you utilize something as collateral, something that the lender can keep to satisfy your debt if you should default. The collateral can sometimes be a large asset, like a car or a boat, or a cash asset, such as a savings account. An unsecured loan is precisely what it sounds like–a loan that is not secured by any kind of collateral. Due to that lack of collateral, unsecured loans are often considered as more risky for the lender, and therefore the interest rates may be higher to compensate them for that risk.
You can apply for a personal loan from a bank, credit union, or online lender. The lender reviews your application, and, if they approve, will offer terms. Once you accept the terms–the length of the loan and the interest rate, for example–the funds will be yours to use however you see fit. Then, you will make monthly payments comprised of a portion of the amount borrowed, as well as interest, until the loan is paid off.
Some personal loans require you to cover additional fees, like a credit check fee or a loan origination fee. Plus, if you want to pay off the loan early, some loans may charge a penalty fee. It’s important to research the specifics when you’re shopping for any kind of loan, and a personal loan is no different!
Credit Cards
You are undoubtedly already familiar with credit cards, those convenient revolving lines of credit. While their distant cousin, the debit card, is used to ferry funds from your checking account, a credit card borrows the money to make purchases. Although many use credit cards for various small or routine charges, it’s possible to use a credit card–or even multiple credit cards–to cover a large expense, such as a remodel.How do credit cards work?
When you charge purchases to a credit card, you are meant to repay the balance you borrowed to make those purchases. For whatever portion you do not repay within a certain term–usually, a month–interest is added to that which you owe. Sometimes, when you open a new credit account, there may be a special promotional 0% APR for a set amount of time (often, a year), in which case, interest would not be added.
Most major credit cards (i.e. Visa, Mastercard, American Express, Discover, etc.) are available through banks and other financial institutions. Besides acting as a credit line, many cards will also offer certain benefits or rewards, like airline miles, hotel rooms, or cash back on certain purchases. Some stores or retailers will offer a co-branded credit card–for example, Amazon’s Visa or Barnes and Nobles Mastercard. Such cards can include benefits that correspond to the store, or offer extra points when used there that will eventually pay off in rewards.
Credit cards are ultra-convenient, but if you can’t make the payments, the interest can really add up. Plus, if you find yourself unable to make the minimum payments on time, you can damage your credit score.
Continue to Part II.
The content on this page provides general consumer information. It is not legal or financial advice. Unison has provided these links for your convenience, but does not endorse and is not responsible for the content, links, privacy policy, or security policy of the other websites.
About the Author
Dr. Lauren Rosales-Shepard
Dr. Lauren Rosales-Shepard is Unison’s content writer. She has a PhD in English from the University of Iowa, and after several years of teaching rhetoric and composition as a college professor, she joined Unison in 2022 to bring her writing and research skills to the realm of fintech in real estate.
