Financial debt is often the beginning of many horror stories that people of all demographics can relate to. Immediate money can be appealing at first, but quickly becomes overwhelming when it takes on the form of student loans, credit cards, auto loans, small business loans, cash advances, consolidated loans, home equity loans, and several other types.
Young adults are hesitant to pay interest on money they potentially won't be able to pay back, but it isn't as complicated or daunting as it's made out to be. Two easy options for borrowing money are through fixed loans and lines of credit.
Fixed Loans
Fixed loans come in various shapes and sizes, but it's a loan where the interest rate doesn't fluctuate. A one-time sum of money is borrowed and a monthly payment is set up with a fixed rate of interest for the term of the loan.
The borrower knows how much they will be taking out on a fixed loan. They have a set monthly payment, the interest doesn't change, and if they want to make extra payments they can potentially lower the amount of interest accrued over the length of the loan.
A personal loan is predictable and is conducive to paying off any preexisting debt with a monthly payment plan and fixed rates of interest. Many college students are also well-acquainted with student loans that come in two variations: subsidized and unsubsidized.
With subsidized loans the rate of interest doesn't begin to build up until the student either finishes their education or is no longer enrolled. In the case of unsubsidized loans interest begins accruing the moment the loan is taken out.
The difference between these kinds of loans and personal loans is that students don't have to make payments on their loan until they are no longer attending college. A six month grace period is given on payments, allowing them time to find a stable career after pursuing higher education.
Line of Credit
A line of credit is very similar to a credit card in that a line is opened and money can be borrowed at any time. It's a revolving line, so the borrower can reuse it if they need to. With a line of credit they can borrow any sum of money as long as it doesn't exceed the limit. Once that amount is paid off, the line is still open and so they can borrow more in the future if they need to.
The biggest disadvantage is that a line of credit has a variable rate of interest, which is dependent on the prime rate that is set by the Federal Reserve, which influences interest rates for several types of consumer financing.
While prime is a big factor in determining how much interest the borrower is going to be paying on a line of credit, other deciding factors include prior credit score and work history.
It is difficult to establish a line of credit if an individual's credit score is poor or non-existent, while taking out a credit card is still possible (with the drawback being incredibly high interest rates). A line of credit is generally used for rainy day funds or in case of an emergency and can be tied to a checking account, which also provides for overdraft protection and convenient use.
Establishing Credit Is Crucial
While young adults may balk at the idea of borrowing money in fear of interest or missing payments, establishing credit is a necessity for any kind of future financing. Fixed loans and lines of credit have their own set of advantages and disadvantages, but both are great for building credit score.
For someone with a poor credit score establishing a line of credit may be difficult and applying for a fixed loan may not be appealing either. To begin building credit a credit card is often recommended and a credit score may rise significantly in as little as three months.
Building credit is essential because it influences various aspects of adult life. This includes signing for an apartment, applying for a car lease, taking out mortgage and car loans; even car insurance is based on credit score.
