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If you’re like most people, chances are you’ll need a loan at some point to make ends meet.
Over the past few decades, Americans have taken on increasing amounts of debt to get by. About 80 percent of American households now hold some form of debt, according to the Pew Charitable Trusts' survey of American family finances. And less than half, or 46 percent, reported making more than they spend.
But when you are short on cash, not all types of borrowing are created equal. Here are some of the best and worst loans out there.
Credit cardsCredit cards are one of the most common — and also one of the most expensive — ways to borrow money. Because card issuers charge much higher interest rates than other types of lenders, carrying a credit card balance can quickly escalate out of control.
Currently, credit card rates are at a record high, at an average of about 17 percent, according to Bankrate, and the average American has a credit card balance of $6,375, up nearly 3 percent from last year, according to Experian's annual study on the state of credit and debt in America.
Good credit card management boils down to making payments on time and relying on revolving credit only in limited situations, according to Greg McBride, Bankrate.com's chief financial analyst.
If you are planning a big purchase, like a large appliance for example, a zero-introductory credit card offer could be a worthwhile way to secure a short-term loan with no interest, as long as the purchase is paid off by the time the introductory period ends, he said.
Otherwise, only buy things with plastic that you can afford to pay off at the end of the month.
Home equityBefore the Great Recession and the historic housing crash, homeowners used their homes to access as much cash as the bank would allow. But borrowers who were burned by falling housing prices, not to mention today's tighter lending standards, are considerably more wary now when it comes to home equity loans and lines of credit — despite the more favorable terms.
Still, the amount of equity today's homeowners are able to tap is at the highest level on record.
One of the most common ways to tap that equity is through a cash-out refinance (which is when you refinance your current mortgage and take out a bigger mortgage) or a home equity loan.
A home equity loan can be withdrawn as a lump sum with a fixed rate and a repayment period generally of five to 15 years or as a home equity line of credit with a variable rate.
The average interest rate on a home equity loan is 5 percent to 6 percent, but under the new tax law the money must be used to improve your home, otherwise the interest is not tax deductible.
Personal loansPersonal loans, or unsecured loans, do not require borrowing against something of value, like a house, which makes them particularly attractive for those without that kind of equity. However, that generally means the loans are available at a higher interest rate than a home equity loan.
Personal loans are also locked in over shorter terms, like one to five years, and payments are generally automatically deducted from a checking account, which decreases the odds of missing a payment or defaulting.
Personal loans are well suited for smaller loan amounts than a typical home equity loan, but more than one would want to run up on credit cards — generally, anything up to $35,000.
