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Choosing the Right Credit Option

If you’ve decided to borrow, it’s important to choose the right type of credit. Start by assessing your situation with these 5 questions:

How much do you need?

Make a realistic assessment of how much you’ll need to borrow, including additional expenses like fees, sales tax, and delivery charges. Remember, the less you borrow now, the less you’ll have to repay later.

  Consider the costs  

It’s important to consider all the costs involved in borrowing ― not just the monthly payment. Learn how to calculate your total cost of borrowing.

Is your need one-time or ongoing?

Determine if you need a lump sum up front, or a source of funds you can access as needed over time.

A loan may be a good option when you have a one-time need

A loan gives you a lump sum to consolidate debt or make a large one-time purchase. Unlike a line of credit, a loan has:

  • A fixed term, so you know exactly when the loan is scheduled to be paid off
  • A fixed rate and monthly payment that stay the same for the length of the loan ― unless it’s a loan with a variable rate like an adjustable-rate mortgage (ARM)
  • A Wells Fargo personal loan has competitive fixed rates, quick access to funds, often within 1 to 3 business days, and no collateral requirements. If your personal loan is approved and you have accepted the loan terms, you will have quick access to your funds, often within 1 to 3 business days.

A line of credit may be the answer for ongoing expenses offering a ready source of funds

Some lenders offer line of credit products to help with large ongoing expenses ― like remodeling your home or covering the costs of a major purchase. A line of credit gives you a ready source of funds that you can use as needed up to your credit limit. Unlike a loan, a line of credit has:

  • A variable Annual Percentage Rate (APR), which is a rate applied to the total amount of your outstanding debt and that can rise or fall based on market conditions
  • An ongoing, revolving term that allows you to use the money up to an agreed credit limit whenever you need it; once you pay down the amount owed, the credit becomes available to draw on again
  • Variable monthly payments based on the amount of the line you’re using and the variable APR

What’s the APR?

When comparing credit accounts, focus on the Annual Percentage Rate (APR) rather than just looking at the interest rate. The APR is the amount of annual interest and may include fees or additional costs you’ll pay averaged over the full term of the loan. Consider the APR when shopping for a loan because it reflects the cost of credit.

  Good credit habits  

Interest rates are partially based on credit history. The stronger your credit score, the better interest rate you may be able to qualify for. Practice good credit habits.

Do you have assets you can borrow against?

If you have some equity in your home, you might want to consider a secured loan. Secured loans use assets, such as your home as collateral, and they may have lower interest rates, higher credit limits, and longer repayment terms. Secured borrowing can be a good option if you want to use the equity you’ve built in your home as collateral.

The amount you may be able to borrow is based on many factors, including your credit history and the available equity in your home. The amount of home equity you have available is the difference between what your home is worth and the amount you owe on your home and other outstanding obligations that are secured by your home.

To calculate your available equity:

  • Calculate an estimate of your home's current market value. This would be what you would sell your house for if you were to sell it today. You can find many resources on the internet to help you with your estimate.
  • Multiply your home's market value by 80%. It's recommended (and required by some lenders), that you keep at least 20% equity available in your home.
  • Determine the amount of the outstanding debt secured by your home. This would include the amount you owe on your mortgage and any existing home equity financing debt.
  • Subtract the outstanding debt from 80% of your home's value. This will give you an idea of the equity in your home that may be available for you to borrow.
Graphic illustrating if the total of the amount you want to borrow and the amount you already owe on your home isn't more than 80% of your home's value, you may be able to access some of your home's equity.

What’s your current financial situation?

Before you apply for credit, it’s always a good idea to assess your current situation:

  • Check your credit report ― the credit options and interest rate you qualify for are based in part on the strength of your credit report.
  • In addition to checking your credit reports for accuracy, you should also know your FICO® Credit Score. Wells Fargo customers can access their FICO Score through Wells Fargo Online®
  • Be sure adding another credit account won’t take you out of your debt-to-income (DTI) ratio comfort zone. Learn more about debt-to-income ratios.

  Before you borrow:  

Learn what lenders look for when they review your credit application.