According to BankRate.com, the cost of an unsecured personal loan is currently over 15% per year, if you manage to get a bank loan in today's credit-starved environment. And that's about your best such rate. Attempt to borrow against a credit card, for example, and it could be a lot more. Obviously, personal loans can get very expensive nowadays.
In many situations, though, a personal loan can be just about unavoidable for many of us. What if the car won't start and you need an expensive engine repair to get it up and running again? Or your daughter needs braces? Or the washing machine breaks down?
Situations like these force many Americans to resort to personal loans, including high-cost payday loans. These loans now make up over 22% of the total non-mortgage installment loans at U.S. banks, up from only 11% in 1998.
But before you sign up for your next personal loan, consider the following options you might not have thought of --
- Try borrowing against your retirement account. Check with your employer's benefits department to see if this option is available. If so, it's another low-interest alternative.
- Selling stocks, Treasury bonds, etc., can be a quick way to drum up some hard cash - just be sure you understand you'll have to pay taxes on any gains or interest.
- What about borrowing against your cash value life insurance policy.? This is a low-interest alternative if you have this type of policy, and it's the most common type.
- Try borrowing against your retirement account. Ask your employer's benefits department if this option is available. If so, it's another low-interest alternative.
- Family or friends. Perhaps your dad can fork over some cash. Just make sure you pay him back.
- Ask your creditors - particularly local merchants who may be more flexible - if they might be willing to extend your payments a month. If they are, make sure you're not getting charged extra for the privilege of paying your bill late - or if you do get charged, find out how much.
- Ask your creditors - especially local mercants who may be more flexible - if they might be willing to extend your payments a month. If sthey are, make sure you're not getting charged extra for the privilege of paying your bill late - or if you do get charged, find out how much.
Good vs Bad Debt
You need to recognize a simple fact of personal finance: Never borrow money for consumption. That's bad debt. Only borrow for investments that will increase in value (and increase by more than the cost of the loan). Borrowing money just in order to spend it is a terrible idea, a royal road to bankruptcy or other financial land mines. As Eric Tyson says in his book, PERSONAL FINANCE FOR DUMMIES:
If you spend, say $4,000 [which you've borrowed] on a Florida vacation, the money is gone. Poof! You may have good memories and even some Kodak moments, but you'll have no financial value to show for it... I'm not saying don't take a vacation. Definitely, take one, two, three, or as many as you can afford yearly. But that's the point - what you can afford. If you need to borrow money... [then you can't afford the vacation]...
And exactly the same advice applies to almost any consumer (noninvestment) purchase: expensive meals, home computers, clothes, yes, even a new car - anything that decreases in value and eventually becomes worth nothing financially. If you have to borrow to buy it, you probably can't afford it. According to Tyson "The financially correct amount of bad debt [you should have] is zero."
This does not apply, however, to things that "retain and hopefully increase in value over the long term, such as an real estate, education or your own business." For these uses, debt is acceptable, up to a limit - the limit being the point at which making payments causes you to be no longer able to save sufficiently to accomplish your financial goals.
All that is excellent advice, but the fact is that, at times, you simply may not be able to avoid adding to your debt load - an emergency or other urgent situation forces you to seek a personal loan. In those kinds of situations, what are your best options?
Essentials of Personal Loan Essentials
Here are some few basics to keep in mind whenever shopping for an unsecured personal loan:
First, never borrow more than you need. Given the high interest rates in today's credit environment, you'll want to keep the amount to an absolute minimum.
Second, compare terms from several lenders. Never look at just the monthly payments - consider the total cost of the loan, including any hidden charges like credit insurance or other fees. Don't skip the small print on the loan agreement. Don't assume what you're being told by a loan officer is binding. It's what's in writing in the contract that counts.
Third, begin by trying your credit union before a bank. Credit unions usually have more favorable terms than banks and are often willing to make small unsecured personal loans to their members.
Fourth, don't pledge your valuable personal assets when you take out a small loan - it's not worth the risk, say the experts. And avoid using credit cards or payday loans if at all possible - the interest rates, especially on the latter, can be prohibitive.
Fifth, remember that the interest you pay on unsecured personal loans is not tax deductible.
Subprime Loans
If you find yourself in the subprime lending category, things get even more complicated. As you know, subprime lending has tightened up greatly over the past months (and is now almost nonexistent in the mortgage market). However, if you are employed, you can still find cash in an emergency - you just have to be prepared to pay a steep interest rate for it.
What exactly does "subprime" mean? The definition varies by lender, but in general subprime means a FICO score of 650 or below. Among the other criteria commonly used are: a bankruptcy within the past five years, a foreclosure within the past 24 months, or a debt-to-income ratio of 50% or higher. Some lenders will even brand you as subprime if you've been late on one or one or two credit card payments over the past 12 months.
There are other important factors to bear in mind if you're considered subprime and yet still need to take out an emergency personal loan. One is to recognize that you won't be viewed the same by all lenders - so you don't have to jump at the first offer you receive. Shop around awhile. As said, be sure to try your credit union first - and also one or more banks that have departments providing subprime lending. Try using one of the online services that allow you to apply at several lenders simultaneously. (I suggest Lending Tree, but there are lots of others.)
Here are a few more important points for subprime borrowers to bear in mind:
Never put valuable assets at risk in order to make a small loan.
Don't risk valuable assets in order to make a small loan.
Don't allow several lenders to access your credit report at the same time. Several inquiries on your credit report within a short period can further lower your credit score.
Don't allow several lenders to access your credit report at the same time. Several inquiries on your credit report within a short period can further lower your credit score.
If possible try avoid payday loans altogether except as an absolute last resort, and even then only use them on rare occasions - never more than once a year. They entail phenomenal interest rates. Payday loans have burgeoned into a billion-dollar industry in the U.S. but they can be ruinous to your financial health. - 15224
In many situations, though, a personal loan can be just about unavoidable for many of us. What if the car won't start and you need an expensive engine repair to get it up and running again? Or your daughter needs braces? Or the washing machine breaks down?
Situations like these force many Americans to resort to personal loans, including high-cost payday loans. These loans now make up over 22% of the total non-mortgage installment loans at U.S. banks, up from only 11% in 1998.
But before you sign up for your next personal loan, consider the following options you might not have thought of --
- Try borrowing against your retirement account. Check with your employer's benefits department to see if this option is available. If so, it's another low-interest alternative.
- Selling stocks, Treasury bonds, etc., can be a quick way to drum up some hard cash - just be sure you understand you'll have to pay taxes on any gains or interest.
- What about borrowing against your cash value life insurance policy.? This is a low-interest alternative if you have this type of policy, and it's the most common type.
- Try borrowing against your retirement account. Ask your employer's benefits department if this option is available. If so, it's another low-interest alternative.
- Family or friends. Perhaps your dad can fork over some cash. Just make sure you pay him back.
- Ask your creditors - particularly local merchants who may be more flexible - if they might be willing to extend your payments a month. If they are, make sure you're not getting charged extra for the privilege of paying your bill late - or if you do get charged, find out how much.
- Ask your creditors - especially local mercants who may be more flexible - if they might be willing to extend your payments a month. If sthey are, make sure you're not getting charged extra for the privilege of paying your bill late - or if you do get charged, find out how much.
Good vs Bad Debt
You need to recognize a simple fact of personal finance: Never borrow money for consumption. That's bad debt. Only borrow for investments that will increase in value (and increase by more than the cost of the loan). Borrowing money just in order to spend it is a terrible idea, a royal road to bankruptcy or other financial land mines. As Eric Tyson says in his book, PERSONAL FINANCE FOR DUMMIES:
If you spend, say $4,000 [which you've borrowed] on a Florida vacation, the money is gone. Poof! You may have good memories and even some Kodak moments, but you'll have no financial value to show for it... I'm not saying don't take a vacation. Definitely, take one, two, three, or as many as you can afford yearly. But that's the point - what you can afford. If you need to borrow money... [then you can't afford the vacation]...
And exactly the same advice applies to almost any consumer (noninvestment) purchase: expensive meals, home computers, clothes, yes, even a new car - anything that decreases in value and eventually becomes worth nothing financially. If you have to borrow to buy it, you probably can't afford it. According to Tyson "The financially correct amount of bad debt [you should have] is zero."
This does not apply, however, to things that "retain and hopefully increase in value over the long term, such as an real estate, education or your own business." For these uses, debt is acceptable, up to a limit - the limit being the point at which making payments causes you to be no longer able to save sufficiently to accomplish your financial goals.
All that is excellent advice, but the fact is that, at times, you simply may not be able to avoid adding to your debt load - an emergency or other urgent situation forces you to seek a personal loan. In those kinds of situations, what are your best options?
Essentials of Personal Loan Essentials
Here are some few basics to keep in mind whenever shopping for an unsecured personal loan:
First, never borrow more than you need. Given the high interest rates in today's credit environment, you'll want to keep the amount to an absolute minimum.
Second, compare terms from several lenders. Never look at just the monthly payments - consider the total cost of the loan, including any hidden charges like credit insurance or other fees. Don't skip the small print on the loan agreement. Don't assume what you're being told by a loan officer is binding. It's what's in writing in the contract that counts.
Third, begin by trying your credit union before a bank. Credit unions usually have more favorable terms than banks and are often willing to make small unsecured personal loans to their members.
Fourth, don't pledge your valuable personal assets when you take out a small loan - it's not worth the risk, say the experts. And avoid using credit cards or payday loans if at all possible - the interest rates, especially on the latter, can be prohibitive.
Fifth, remember that the interest you pay on unsecured personal loans is not tax deductible.
Subprime Loans
If you find yourself in the subprime lending category, things get even more complicated. As you know, subprime lending has tightened up greatly over the past months (and is now almost nonexistent in the mortgage market). However, if you are employed, you can still find cash in an emergency - you just have to be prepared to pay a steep interest rate for it.
What exactly does "subprime" mean? The definition varies by lender, but in general subprime means a FICO score of 650 or below. Among the other criteria commonly used are: a bankruptcy within the past five years, a foreclosure within the past 24 months, or a debt-to-income ratio of 50% or higher. Some lenders will even brand you as subprime if you've been late on one or one or two credit card payments over the past 12 months.
There are other important factors to bear in mind if you're considered subprime and yet still need to take out an emergency personal loan. One is to recognize that you won't be viewed the same by all lenders - so you don't have to jump at the first offer you receive. Shop around awhile. As said, be sure to try your credit union first - and also one or more banks that have departments providing subprime lending. Try using one of the online services that allow you to apply at several lenders simultaneously. (I suggest Lending Tree, but there are lots of others.)
Here are a few more important points for subprime borrowers to bear in mind:
Never put valuable assets at risk in order to make a small loan.
Don't risk valuable assets in order to make a small loan.
Don't allow several lenders to access your credit report at the same time. Several inquiries on your credit report within a short period can further lower your credit score.
Don't allow several lenders to access your credit report at the same time. Several inquiries on your credit report within a short period can further lower your credit score.
If possible try avoid payday loans altogether except as an absolute last resort, and even then only use them on rare occasions - never more than once a year. They entail phenomenal interest rates. Payday loans have burgeoned into a billion-dollar industry in the U.S. but they can be ruinous to your financial health. - 15224
About the Author:
Joseph Ryan is Director of Washington Research Associates, Inc., Washington DC. The firm's website, Web Search Guides provides helpful 10-minute tutorials on topics of current interest, such as people searching, asset-searching, online shopping, student financing, and many others.
