Best and Worst forms of Loans during Coronavirus Crisis
The global pandemic caused by Coronavirus has pushed the world into a recession Millions of Americans are now in a quandary, risking going without pay for an unpredictable time. 75 percent of Americans are living paycheck to paycheck, which means that the country is on the verge of a financial crisis.
The Fed has geared up to increase the credit flow to homes and businesses, as a way to tide over the situation. Though rates of borrowing may be borrowed, it is still not easy for the borrowers, because banks are not interested in losing money, especially at this time.
From a consumer point of view, here are the worst forms of loans to take, when you are going through a financial crisis.
Payday Loans
Payday loans, also known as cash advances, are not recommended for borrowing money during crisis times. Though these loans that are valued at $500 or less to meet an urgent financial exigency is available readily through payday lenders offline and online, paying the interest can be an uphill task. Apart from steep interest rates, there are payday loan fees and finance charges involved.
So, it is recommended that if you do take a payday loan, you pay it in one shot, to avoid the interest rate creeping in. With payday loan fees touching almost $30 per $100 borrowed, we are looking at a very expensive loan product, equivalent to 400 percent APR.
Credit Card Cash Advance
People often use credit cards to splurge on products and services, the payment of which can be done later by the next bill statement.
However, using credit cards as cash advances can turn out to be an expensive proposition. While the normal rate of interest on credit is pegged at 16 to 17 percent, cash advances have interest rates that are almost 25 percent and even higher, in certain cases. Then there is the aspect of transaction fees that also increases the cost of credit card cash advances.
401 K
There are two schools of thought about tapping the 401 K. While most financial advisors state that 401K loans should not be availed of, federal law has a provision to permit employees up to 50 percent of the account balance, the maximum permissible amount being $50,000,
Borrowers have a period of up to 5 years to pay back their loans. The interest rate is lower than most forms of borrowed money, especially advances on credit cards. The flip side is that you are cutting down on your retirement reserves, which can be a blow to your retirement planning. This is because you are throwing a spanner on the power of compounding which helps your money grow exponentially.
Let us now look at some of the best financial products to use when it comes to borrowing money
Personal Loans
Personal loans, also called unsecured loans, do not need any collateral, which means you do not borrow money against any kind of tangible asset. This also means that personal loans come with a high-interest rate, which is more than a home equity loan, but you can still get them at a good rate if you have a decent credit score.
Personal loans have a lock-in period of short time frames, like one to five years. Payments are debited automatically from your checking account, so the chance of defaulting on the outstanding money is quite less. These loans are tailored for smaller amounts as compared to home equity but are on average, more than the average outstanding money you'd have on your credit card.
Though the average interest rate on a personal loan is 11 percent, someone with a good credit score can get the money at just a 5.5 percent interest rate, which is lesser than the Annual Percentage Rate on a credit card.
Balance Transfer Options
Financial experts vouch for the smart planning that comes with a balance transfer credit card. Instead of paying a high-interest rate on your credit card, you can avail of a credit card with a balance transfer option. This is especially helpful during financially trying times, you get the opportunity to transfer your balances to this card at 0 percent or extremely nominal interest rate for a period from six months to one year.
Negotiating for better terms with your credit card issuer
With tough times on the anvil due to coronavirus, most credit card issuers are happy to give you a break. However, you have to check with your credit card company on the leeway they provide, from deferring a monthly payment to reducing interest charges for a certain period. But even if we are not going through a financial crisis, you can negotiate better terms like waivers on credit card fees, late fees and giving you better terms, especially if you have a good credit history.
Home Equity
You can use the equity in your home to borrow money at good rates. One of the best options is the cash-out refinance factor, wherein you refinance your present mortgage to get a significantly higher-priced mortgage or home equity loan.
You can withdraw home equity loans as a lump sum with a fixed rate and a repayment period ranging from 5 to 15 years. You can also benefit from the home equity line of credit (HELOC) at a variable rate of interest. The average interest rate is almost 5.6 percent on a home equity loan and almost 6 percent for HELOC.