Ways to Borrow

As you consider taking on additional debt, whether it's a loan to purchase a home, a home equity loan, an auto loan, a student loan or an additional credit card, you'll want to think about potential pros and cons of borrowing, and what to look for when shopping for a loan.

Credit cards (including secured credit cards)

When you use them responsibly, credit cards can play an important role in helping you manage your financial life, as they provide convenience and security. An essential part of smart credit card borrowing is choosing the right card and the right card issuer — a bank, credit union or other financial services company. That's because each issuer determines its own:

• APR, or annual percentage rate
• Grace period
• Method for calculating outstanding balance
• Fees that may apply
• Minimum payment amount

These factors, in turn, determine what using this form of credit costs you.

• The APR, or annual percentage rate, is a way of expressing how much borrowing will cost you on a yearly basis if you carry a balance. In the case of credit cards, the APR includes only the annual interest rate the issuer charges you on your outstanding balances and does not include any other potential fees. But you should be aware that there can be various APRs — including an introductory APR for new cardmembers, a standard APR for purchases, an APR for balance transfers and an often higher APR for cash advances.
• The grace period is the number of days you have to pay for a purchase before a finance charge is added to what you owe. If you always pay your outstanding balance in full within any allowed grace period, you won't pay finance charges. But if you only pay the minimum payment or a payment less than the full outstanding balance, finance charges apply from the date a purchase is made.
• The method of calculating your outstanding balance on which interest is charged can also vary based on the credit card issuer and is explained in your credit agreement. What you pay in finance charges, which is the dollar amount you pay for use of credit, is based on how your outstanding balance is determined and the APR on your account.
• Average daily balance is the most common method. It is calculated by adding the amount you owe each day in your billing cycle and dividing by the number of days in the cycle to arrive at your average balance for that period or cycle. So if you pay off a large portion of your balance early in the cycle, your finance charge will be less than if you paid later in the cycle.
• The adjusted balance method can be the most economical. Your payments during the cycle are subtracted from your beginning balance and charges apply only to the difference.
  
• The previous balance method is the most costly. Payments you make during the cycle don't reduce the balance. Instead you pay a finance charge on the full amount you owed at the start of the cycle, regardless of any payments made during the cycle.

Some credit card issuers charge an annual fee for using their cards, but many do not. Most card issuers charge late fees that apply if you don't pay at least the minimum on time, and over-limit fees if you charge more than your credit limit. All these fees are in addition to the APR.

Click here for a printable checklist to help you choose a credit card.

Mortgage loans and home equity loans

For many people, becoming a homeowner involves borrowing money from a lender in the form of a mortgage loan. Because a mortgage loan payment is probably the largest expense within a household budget, there are some important things to consider before you commit yourself to this major expense.

First is the type of mortgage loan product you select to purchase your home. While lenders offer many different products, you'll want to be sure the one you choose fits your financial situation. If the uncertainty of having a mortgage payment that can go up or down over time makes you uncomfortable, you'll want to be cautious when considering an adjustable-rate mortgage. While lower payments are not an issue, the question is whether you could handle payment increases, especially if you were also facing unanticipated personal problems, such as job loss, unexpected illness or divorce.

In addition, if you need two incomes to meet the initial payments on a mortgage loan, ask yourself how you'd manage with just one income, should that turn out to be the reality. Before you commit yourself to this potentially stressful situation, take the time to reevaluate the type of loan you are seeking, the amount you plan to borrow and even whether now is the right time to purchase a home.

Click here for a printable checklist to help you choose a mortgage.

Auto loans

If you're borrowing to buy a car, you generally have at least two options in choosing a lender. One is to arrange direct lending through a bank or credit union—perhaps the one where you maintain your checking and savings accounts. That way you'll be preapproved, so you'll know what you can afford to spend before you shop and what the loan will cost you.

The other way to finance the car is through dealership financing. While you may be able to arrange favorable terms, especially in a competitive market, there may be additional charges you aren't aware of or things you agree to in the excitement of buying that turn out to have a high price tag.

Sometimes a dealership may offer "0% financing" or other incentives to attract buyers. But that deal may apply to only a limited number of models or to consumers with very high credit scores. You may also risk significant finance charges if you are ever late with a loan payment. The bottom line is to be extremely cautious about any loan that's too easy to arrange or any rate that's significantly cheaper than the rate other lenders are offering. If it seems "too good to be true," it probably is and you should ensure you fully understand all terms of the deal.

Click here for a printable checklist to help you choose an auto loan.