Long-term loans offer better interest rates, making it easier to borrow large sums. If you need time to pay back a loan, consider a long-term option.
1. SECURED LOAN
Backed by an asset such as a home, secured loans—including home equity and auto loans—usually have a fixed term and interest rate.
- Who can get it: Most borrowers with a monthly income and a valuable asset
- Cost: Depends on your collateral and credit history. Home equity loans let you borrow just above mortgage rates (currently around 4 percent to 5 percent fixed), while loans secured by stock may be 10 percent or higher.
- Risk level: HIGH. If you default, you will lose the asset you put up as collateral, even if it’s worth far more than the loan. Also, some lenders will penalize you for early payoff, so read the fine print carefully before you sign.
- Best choice when: You need a single long-term loan and you have equity in your home or other valuable asset.
- Get started: Try to secure a favorable rate at your own bank or credit union. To compare rates online, visit bankrate.com.
2. PEER-TO-PEER LOAN
- Who can get it: Borrowers with a good credit rating are eligible for competitive interest-rate loans in the 9 percent to 11 percent range that beat unsecured bank loan rates by eliminating overhead costs.
- Cost: A borrower with excellent credit can get as low as 6 percent; those with poor credit, 35 percent. Tack on an origination fee of 0.5 percent to 5 percent—depending on your credit rating—of the total loan amount.
- Risk level: MEDIUM. Late payments result in late fees and eventually are reported to the credit bureaus.
- Best choice when: You have good credit and want a better interest rate and a faster loan process than those offered by a bank.
- Get started: Visit prosper.com or lendingclub.com.
3. HOME EQUITY LINE OF CREDIT
A cross between a home equity loan and a credit card, a Heloc is flexible and accessible when you need it.
- Who can get it: Anyone who has equity (usually of at least 20 percent) in a home. The better your credit, the more favorable the interest rate and terms.
- Cost: Most Helocs charge variable interest rates, which are currently less than 5 percent. Bonus: If you itemize your deductions, you can also deduct the interest from your taxes.
- Risk level: HIGH. You could lose your home if you default. Also, some Helocs charge interest only for a period of years, then hit you with a fat balloon payment. Plus, if interest rates rise, your payment could soar.
- Best choice when: You have decent credit and anticipate occasional specific short-term needs (like home projects, not credit card debt) that you can pay off.
- Get started: First head to the lender that holds your mortgage, with which you have a proven track record. Also compare rates at bankrate.com.
4. COMPANY 401(K)
Many corporate savings plans allow you to borrow up to 50 percent of your vested account balance.
- Who can get it: Anyone who participates in a company’s 401(k) plan, as long as the employer allows for loans (61 percent do).
- Cost: Aside from a small processing fee, interest you pay on 401(k) loans (currently the rate is about 4.5 percent) goes back into your account. So these loans are practically free. However, you lose the potential earnings on the borrowed amount. If you borrow $10,000 from an account that earns 8 percent annually (and you have 25 years until retirement), a three-year loan will cost $14,711 in lost growth, while a five-year loan will set you back $19,831.
- Risk level: LOW. If you leave the company before the loan is paid off, you have to repay it within 60 days or you’re hit with a 10 percent early-withdrawal penalty, and you have to pay income tax on the balance. The risk is much greater, however, if you don’t have much in your retirement fund, because that threatens your financial security.
- Best choice when: You already have a significant sum in your 401(k) and you plan to stay in your job long-term, or your credit isn’t good enough to obtain a loan elsewhere.
- Get started: Consult your company’s 401(k) plan administrator.