NEW YORK – You need money for home improvements, a car, an investment opportunity or to pay off those high-interest credit cards. You may be surprised at how many different ways there are to use your existing assets to get a good loan.
Here are six sources for general purpose loans:
The equity in your home. By borrowing against the value of your house, a figure that has risen substantially in the past few years for many Americans, you can get a substantial sum at favorable rates and the interest is tax-deductible up to $100,000. If the money is used for home improvement that figure is $1 million. Consider a home-equity line of credit instead of a home-equity loan if you need money available for recurring expenses. That way you can withdraw money as needed and only pay interest on what you owe. Rates: currently averaging 6.2% for a $30,000 line of credit, 7.2% for a $75,000 loan.
Your 401(k). Many employers allow you to borrow against your 401(k) or other retirement accounts, up to 50% of the assets or $50,000. Usually you will have to repay the loan through payroll deductions within five years, longer if you are buying or renovating your home. Rates: employers usually charge one or two percentage points above the prime rate.
Your stock portfolio. If you own stocks, bonds or mutual funds you can take out what's known as a margin loan from a stockbroker for up to half the value of your securities. The interest you'll pay is deductible up to the amount of income you earn on the loan amount unless the securities are tax-exempt. If the value of your securities drops, your broker may demand more of your portfolio as collateral. Stay on the safe side and don't borrow more than 20% of your portfolio's value. Rates: generally between 0.5 and 2 percentage points above the so-called broker's call rate, currently around 6%.
Your life insurance policy. If you own a whole, universal or variable life insurance policy you can borrow the amount of the policy's cash value. You'll have to pay taxes on the interest and if you don't repay the principal the outstanding debt will simply be withdrawn from your death benefit, which may hurt you later in life when a valuable policy can hedge against rising premiums. Rates: vary between insurers.
Your local bank. Try the branch where you have a savings or checking account or a credit union. Regular customers sometimes earn rates of one or two percentage points below those for noncustomers. An unsecured personal loan will come with a higher rate but it may still be lower than what you're paying on your credit cards. If you secure the loan you can earn a lower rate and you may be able to borrow against a relatively new car, boat or other asset. Rates: vary depending on institution and collateral.
Relatives and friends. Don't borrow from friends and family long-term; you'll fray your relationships. But don't discount a personal loan either. You may be able to pay a higher rate than your relative would earn on money if it were to remain in a bank account and the interest will still be far less than on a credit card.
Copyright (c) 2006 MarketWatch, Inc.