Getting a Personal Loan
Article by Terry Daniels
When you are in a bind and find you are short on cash, a personal loan may be an option for you. There are other options and this may, or may not be, the best choice for you.
So it is important to understand what a personal loan is before taking one out.Personal loans are unsecured. There is no property, such as a home, offered as collateral. This is a key difference between personal loans and other types of loans.
Rates are typically higer. Because they are unsecured, interest rates for personal loans are higher than secured loans (such as a mortgage or home equity loan). Still, they are lower than credit card rates — after the credit card’s initial teaser rate, that is.
They have a fixed term. A personal loan can be due at the end of a set term, in which case the interest rate is fixed.
Revolving credit is sometimes offered. Some personal loans work as revolving lines of credit similar to credit cards. In this case, the interest rate is variable.
If you don’t own a home, or you don’t have much equity in your home, a personal loan may be your best choice if you are in need of money. If you get a personal loan with a fixed rate and term, it forces you to be disciplined and pay the loan off within the specified time frame unlike a credit card, which tempts you to continue spending.
Also, the interest rate on a personal loan is usually lower than that of a credit card, although the credit card’s initial teaser rate may be lower. A personal loan has some disadvantages to consider. For example, the interest payments are not tax deductible, while the interest on a loan secured with property usually is.
Also, rates can easily be over 10 percent on a personal loan. Mortgages and home equity loans are usually closer to 6 percent. Therefore, you end up paying far more on a personal loan than you would on a home equity loan for the same amount.
Still, in some situations, a personal loan is the best option. If that is the case for you, be sure to consider your options carefully. Compare products from several different lenders.
You can find several lenders online to compare, or you can get out your local phone book and start calling to get quotes on loans. Either way, you need to make an educated decision before going with a loan.
Like groceries, you will have many choices and after reading labels and checking prices, you pick the one that works best for you.
A secured loan is guaranteed by property and, therefore, has a lower interest rate. For example, a mortgage is a secured loan, guaranteed by the home itself. If the borrower defaults on the loan, the lender can take possession of the home to recoup the money on the defaulted loan. The fact that the lender has the collateral in case of default is part of what drives down interest rates on secured loans.
In addition, the very fact that the borrower’s home is used as collateral ensures the lender that the borrower intends to repay the loan. Secured loans are considered good risks for lenders, and that is why they come with lower interest rates.
An unsecured loan does not use collateral. Since no property is used to guarantee the loan, it’s a greater risk for the lender.
For example, if a borrower uses a home equity loan to obtain a ,000 loan, the lender can be assured that the borrower won’t default on the loan because it is secured with the home. A personal loan — one without collateral — for the same amount is not as safe for the lender.
Because of this, the lender charges higher interest rates to balance out the greater risk. Even though the interest rates on personal loans are higher than those of secured loans, personal loan interest rates are usually still lower than credit card rates — at least after the initial teaser rates.
If a secured loan is not an option for you, then a personal loan still might be a better choice than a credit card.
About the Author
Terry Daniels has a PHD in financial services and has written hundreds of articles relating to consumer services and cash advance payday loan<a>. He has been a consumer advocate for nearly 25 years.
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