April 10, 2017
We’ve all been there – the bills are due or an emergency expense arises, and we’re just short on cash. When this happens, you have a few options. You can borrow from friends. You can take the modern but uncertain path and crowdfund what you need. Or, you can take out a loan.
Depending on how much money you need and the state of your credit, your ability to get a loan will vary, but typically your best bet for a sudden expense is a personal loan. But how do you get one? For those with reasonably good credit, the process is simple.
To apply for a personal loan, you’ll need to submit personal and income information and put up collateral based on the amount you need to borrow. You may be offered a fixed or variable rate loan and the rate you’re offered will depend on how good your credit it. The bank wants to feel secure that you’ll pay it back and be protected if you default.
One particular type of personal loan is a home equity loan in which your home is the collateral. Obviously you’re only eligible for such a loan if you’re a homeowner. If this isn’t the case, you may be able to use your car, jewelry, or other high-value personal items as collateral on your loan.
Interest Rate Issues
As noted, when you apply for a personal loan, you may be offered a variable or fixed rate – meaning the interest rate may change with the market or remain the same based on when you apply. In either situation, however, personal loans are typically preferred to putting a big expense on a credit card because they have a lower interest rate. Credit card interest rates are typically fairly high because they are meant to be paid off quickly for a series of mid-range purchases.
Some same concerns about interest rates apply to payday loans, which many people view as an alternative to personal loans for unexpected expenses. Payday loans are typically so small that users are charged on a weekly or biweekly basis per $100. Experts have calculated the interest rate as averaging 400% annually. That’s compared to a high credit card rate of about 25%.
Borrow With Care
Ultimately, it’s important to do your research before you borrow, no matter what approach you choose. For example, if you choose to borrow from an online bank because you have less than stellar credit, beware advance fees. Many of these banks say they offer loans to those with poor credit histories because they assume such individuals aren’t financially literate. They assume you won’t do your homework and they scam you out of money by demanding unreasonable fees. These aren’t reputable banks and even with bad credit you can get a loan elsewhere.
Personal loans are there when you need enough money to cover a major expense – a roof repair or a medical bill, for example – and they can help you maintain sound financial standing. As you look around the marketplace, though, beware the one-off sites and internet banks. Borrow from a reputable bank and you’ll be on the road to financial security.