Where to borrow money for college, cars and other goals
The ways you can borrow money are almost as diverse as the ways you can spend it. If you are thinking about borrowing money, make sure you know all your lending options. Here are some guidelines for deciding how to borrow, how much to borrow and how to finance a range of purchases.
How much can you afford to borrow?
No matter your reason for borrowing money, you'll want to be sure you can afford to pay it back. Many lenders use a debt-to-income ratio, or DTI, as a benchmark to see whether a borrower can afford a loan. According to one common guideline, all debt, including your mortgage payment, should not exceed 36 percent of gross income. But the best way to gauge your ability to repay a loan is to build a budget with realistic estimates of your income and spending.
Your next step is finding the best way to borrow for you. Here are some suggestions on how to borrow money for a range of goals:
1. College: Start by looking at federal Stafford, Perkins, or Parent PLUS loans, which feature fixed interest rates. Some federal student loans offer deferred repayment until after the student has left school. Private loans from banks or other private lenders are also available. Private student loans can be used to fill the gap between the federal loans and aid you receive and the total cost of your education. Learn more at your college's financial aid office, at Free Application for Federal Student Aid (FAFSA), and at Bank of America’s Ultimate Money Skills.
2. Home: Banks, credit unions and specialty financial services companies offer loans for home purchase, refinancing or renovations. Visit Bank of America's Home Loans to learn more.
3. Auto: You have the option of leasing or financing an auto loan. Leasing can be tempting because the monthly payments are often lower. However, there are often additional fees, and when a lease ends, you must return the car or pay the remaining balance. For auto loans, the dealership is just one source that can help you find a source for borrowing money, along with banks, credit unions and finance companies. Before you walk into a dealership to buy a car, you might want to have another offer (or two) in hand so you can compare. Learn more about Bank of America’s vehicle loans.
4. Weddings: If you don't have enough saved for a wedding, you might consider a personal loan. Available through banks and private sources, personal loans often have lower rates than credit cards, but higher rates than loans backed by collateral such as a car or a home. They also provide fixed rates and terms, which forces you to be disciplined and pay the loan off within a given time frame.
5. Computers or home appliances: Arguably the best way to finance personal expenses is to save up. But many people pay with a credit card, and then carry a balance from month to month. This is similar to taking out a loan—but with a higher interest rate. For major purchases, another option might be a store credit card. While the interest rate can be higher than a bank-issued credit card, you may be able to take advantage of a good deal or promotion (for example, 10% off your first purchase), so do the math to decide whether it's worth it.
Now that you have a better idea how to borrow money for your big goal, be sure to shop around to get the best rates and repayment terms. You'll better enjoy what you buy when you know you can afford to pay for it.
What's next? Keep your debt load manageable