Have you ever needed a personal loan?
When I was 20 I wanted to buy a car. I set a budget of $3,000, which is about the balance of my savings at the time. I wasn’t comfortable dropping all my savings on a car though; I wanted to to ensure that I still had money in an emergency fund just in case something came up. (I was living in England at the time and international flights aren’t cheap!).
I decided to take out a loan to buy a car. Unfortunately, I didn’t know which car I wanted to buy, how much it would cost, or any of the details the bank needed to know. When I went in for the loan they told me they needed to see the car, look up it’s value, verify it was registered and insured, etc. This was my first venture into buying a car on my own and since I didn’t even have a car lined up, it seemed like too much of a hassle.
So I applied for a Signature Loan (or personal loan) instead of a car loan. The difference was that I wasn’t using the car as collateral – just my name. The interest rate on the personal loan was about 10% instead of the 4% I could have gotten on a car loan, but it was also much easier for me to buy the car because I could do it at my own pace. I wasn’t planning on keeping the loan long anyway – just long enough to pay it off without affecting my emergency fund.
This story has a happy ending – I got the $3,000 personal loan, the bank deposited the $3,000 in my account, I found a car a week later for about £1,200, or roughly $2,000 at the time, and I immediately repaid the $1,000 difference back on the loan. So I owed $2,000 for the car at 10% interest. I think I paid it off in 7 months, which wasn’t bad, considering I was only clearing about $400-500 every paycheck.
How to Get a Personal Loan
Buying a car isn’t the only reason you may need a personal loan. It could be when something unexpected occurs, for convenience, or a multitude of other reasons. Other reasons could be home repair loans, student loans, medical bills, consolidating high interest debt, starting a business, or just getting by when times are tough.
Getting a personal loan usually requires a credit application where the lender will look up your credit score, credit history, employment, or other factors.
Where to Get a Personal Loan
There are many places to get personal loans, but they aren’t all created equally. Before applying for a signature loan, be sure to investigate the company’s reputation, interest rates, fixed or variable interest rates, prepayment penalties, minimum loan payments, loan requirements, whether or not the lender requires collateral, or other factors that may affect the loan. The following are options for obtaining a personal loan.
Personal Loans from Peer to Peer Lending Networks
The premier peer to peer lending companies on the market are Lending Club and Prosper. P2P lending is where individuals apply for loans that are funded by a community of investors – people like you and I can purchase part of the loan, usually in $25-$50 increments. The benefit to the borrower is interest rates that are typically the lowest they can find for a similar loan. The only downfall is that good credit is a requirement. Check these sites for more information:
Personal Loans from a Bank or Credit Union
The bank and credit unions are probably the first place most people will choose to visit. They are community lenders and the financial institutions most people are familiar with. Banks and credit unions will probably require more paperwork and time to get a loan approval than a P2P lending company, and the interest rates may be higher. But you also have the added advantage of dealing with a person and company you deal with on a regular basis.
Tap into Home Equity
A Home Equity Line of Credit (HELOC) is a line of credit that is established against the equity you have in your home. A HELOC can be a quick and easy way to get access to cash. However, there are some dangers involved with using a HELOC because if you default on your loan, you could lose your house. That is why it is important to be very careful when taking out a HELOC. You can read more about the pros and cons using a HELOC to consolidate debt or for other personal loans.
Balance Transfer or Credit Card Cash Advance
There are two reasons why people would consider using a credit card for a large loan: to consolidate debt, or to make new purchases. Using a credit card to consolidate debt is a great idea if you can transfer your high credit cared balance to a 0% balance transfer card. Reducing a high interest credit card rate to a 0% rate can save you hundreds or thousands of dollars.
I don’t like the idea of using credit cards for cash advances or major purchases, but I understand that it may be unavoidable for some people. If you take out a cash advance from a credit card, be sure to investigate any fees, minimums or other possible expenses.
Another, and preferred option, is to apply for a 0% APR credit card that offers 0% interest on purchases for an introductory period. Only use credit cards as a last resort and if you have a plan in place to repay the loan in a short period of time.
Tip: Here is more information about how you can create your own personal debt consolidation plan.
What About Borrowing Money from Family or Friends?
I left family and friends near the end because there are many issues involved when it comes to borrowing money from people you know well. My suggestion is to do one of two things if you are borrowing money from a family member or friend, or loaning money to a family member/friend: put everything on paper into a legal document so there are no misunderstandings and both parties are aware of the legal consequences of the loan, or simply only lend money that you can afford to lose and be prepared to consider it a gift if the other party does not repay. Personal debt collection is not a fun task and can ruin relationships if you are not careful.
Payday Loans – the Last Resort
Payday loans are one of the worst deals out there – often with annual percentage rates exceeding 100%. I cannot advise anyone to get a payday loan unless it means the difference between being put out on the street or having your vehicle repossessed. If you take out a payday loan, please recognize this as a sign that it is time to reevaluate your financial situation. Get the loan repaid as quickly as possible, and make it a priority to reduce your expenses, increase your income, or both.
Other Ways to Raise Cash
Depending on how much money you need and how quickly you need it, you may be able to raise cash other ways, such as taking on a part time job, hosting a yard sale, selling items on Craigslist or Ebay, taking clothing or other items to consignment shops, or other ways. These tips are usually only a short term solution to a larger problem, so it may be best to begin looking for ways to trim expenses, earn more money, or both.