Suze Orman warns against borrowing in this common situation

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You could end up paying more than expected over time.


Important points

  • Different loans have different characteristics that come into play during your payout period.
  • Care should be taken with loans without a fixed interest rate.

There are various reasons why you need to borrow money. Maybe you need your car repaired and don’t have money in your savings account to pay for the repair. Or maybe you want to renovate your home and need a loan to do it.

There are several loan products that you can turn to when you need to borrow money. However, financial expert Suze Orman warns borrowers to be very careful when borrowing money in certain circumstances.

If you don’t get a fixed rate loan

Some loans, such as B. personal loans, are equipped with fixed interest rates. This means that if you sign a loan at 6%, that 6% interest rate applies to your debt until it is repaid. It also means your monthly payments on that loan will stay the same over time.

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Adjustable rate loans work differently. And those are the ones Orman should keep borrowers away from.

Credit cards, for example, tend to charge variable interest rates. So the interest rate you pay on your debt at the beginning could increase over time.

The same goes for home equity lines of credit, or HELOCs. HELOCs are often hailed as an affordable lending option because lenders take limited risk in issuing them (since they are based on an existing property’s equity). And HELOCs can be very flexible. Once you have access to a line of credit, you typically have a good five to 10 years to draw on it as needed.

But Orman cautions that the problem with HELOCs is that their interest rates tend to reset monthly. And while you might initially pay 5% interest on a HELOC, over time that 5% could spiral into 6%, 7%, 8% or more, leaving you with higher payments and forcing you to spend more interest than you expected.

A dangerous step at the moment

While taking out an adjustable rate loan is generally risky, you need to be extra careful right now. The reason? The Federal Reserve is raising interest rates in hopes of slowing the pace of inflation. That should drive up consumer lending rates. So by signing a HELOC, you could be paying more and more interest on your debt as interest rates rise across the board.

In fact, if you want to borrow the equity you have in your home, a home equity loan is probably a better choice. That way, your interest rate doesn’t change over time, and it’s easier to budget for your ongoing loan payments.

While borrowing by charging a credit card may seem like the easiest route, it could also prove to be the most costly. Not only are credit cards notorious for charging high interest rates, but their variable nature means you could really end up getting over your head. So this is a situation that is best avoided.

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