Nov 16, 2019 4 min read

I recently explained financial tools for saving money. Here are three of the most common tools for borrowing money.

Vehicle loans, home equity loans and credit cards are the most common financial instruments used today. Vehicle and home equity loans require some type of collateral – something pledged as security for repayment of a loan, to be forfeited if a loan is not paid back. A lending institution issues credit cards to people whom the institution believes have the economic resources to repay the credit card limit in a timely manner.

Vehicle loans consist of several types: Refinance, dealer purchase, private party, lease buyout and personal secured. When one thinks of vehicle loans, a car loan first comes to mind. Vehicle loans also can be used to purchase boats, motor homes, travel trailers, motorcycles and all-terrain vehicles.

When shopping, you will need to know several features of a vehicle loan to decide what is best for you. The interest rate on the loan, commonly known as the annual percentage rate (APR), is the finance charge expressed as an annual rate. Term refers to the length of the loan, and is usually expressed in months: 12, 120, etc.

The monthly payment is what you are required to pay each month back to the lender. If you look only at the monthly payment, you may find yourself in a loan that is affordable, but over time may cost more than you planned. Interest rates will vary depending on your credit score, age of the collateral and term of the loan (longer term, higher rate).

Home equity loans consist of mortgages, home equity loans and home equity lines of credit. Home equity loans are used to purchase homes, remodel homes and get cash for other purposes, using the equity in your home. Equity is the value of your property minus any deductions for loans against it. Like vehicle loans, you will want to know the APR and monthly payment. The length of the loan or term is expressed in years; one, five, 20, 30 years.

Home equity loans also have fees known as a closing cost. These fees go toward appraisals, title search, credit reports and flood zone determination.

A term you may not be familiar with is escrowing. To insure taxes and required insurance on a property are paid, the lender may require your monthly payment to include extra money, which will be held in an escrow account until they are used to pay such expenses.

Mortgages are designed for people who plan to live in their homes for extended periods. They usually have lower APRs, but higher closing costs. Home equity loans and home equity lines of credit are designed for people who want to close quickly and do not want to pay a closing cost. Determining whether a home equity loan or home equity line of credit is best for you requires an understanding of the features of each.

Mortgage loan originators specialize in issuing mortgages and home equity products. They are licensed by the state and can be identified by a number that has been assigned to them. Their NMLS number is unique to them and must be provided to you before they can discuss home equity loans.

Credit cards enable people to borrow money for purchases today with an understanding that the money will be paid back within a short period. Most credit cards will charge no interest if the borrowed money is paid back within the stated due date.

Because credit cards lend money without any collateral, the interest rates charged are higher than vehicle loans or home equity loans. Credit cards are designed to enable people to make smaller purchases (televisions) immediately, but should be paid off in short periods of time.

Borrowing any amount of money takes serious thought. Most lenders today provide advice on what type of loan is best for you. Remember, in the end you will be responsible for paying back a loan.

Bob Hollick is a State Farm Insurance agent based in Washington.

To submit columns on financial planning, investing or business-related matters, email Rick Shrum at rshrum@observer-reporter.com.