Personal Loan Options

    A secured loan or an unsecured loan personal loan is typically issued for a specific amount and can be used for various purposes at the discretion of the borrower. It can be used for anything from consolidating debt to remodeling a home, and everything in between.

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    What Is A Personal Loan

    A personal loan can be a secured loan or an unsecured loan. This kind of loan is used for everything from funding an education or financing a new business venture to purchasing luxury items or taking a lavish vacation. A secured loan uses an asset — such as a house or car — as collateral (or support). If the borrower defaults on the loan, the creditor can take the asset. An unsecured loan does not require collateral, so it is considered high risk for the lender. As such, it has a higher interest rate.

    Personal loans have evolved over the years to meet the changing needs of the consumer. It used to be nearly impossible to get a personal loan with a limited or bad credit history, but today there are loan options for people with bad credit and nearly every other type of consumer.

    Benefits Of Choosing a Personal Loan

    The major benefit of a personal loan is in the name: It’s personal. You can use it for any reason you like and you don’t need collateral to get one.

    The choices range from something practical like consolidating credit card debt or remodeling the bathroom to something whimsical like buying a boat or taking a European vacation. The choice is yours.

    Personal loans, especially unsecured ones, usually don’t require much more than filling out an application form and supplying documents that verify your financial standing. The money doesn’t have to come from a traditional source like banks or credit unions.

    Family and friends can be the source of money, though it is advisable to have a formal loan agreement with them to make sure the relationship doesn’t go sour. There also are a number of peer-to-peer online lending sources like Prosper and Lending Club, as well as sites like Kickstarter and IndieGoGo that cater to entrepreneurs. The online sites normally charge a fee, but if you need money and need it fast, this is one of the options available.

    Some other benefits of personal loans include:

    • You get the money faster. In most cases approval is much quicker than with conventional loans.
    • Don’t need a bank. The money could come from an online lender, a family member or friend.
    • Fixed rate interest, fixed length of repayment and fixed monthly payments
    • Loan amounts available from $1,000 to $100,0000
    • Lower interest rates than credit cards.
    • If loan comes from bank, possible discounts on interest rates.

    Personal Loan Knowledge

    It is important to be familiar with loan terminology when entering into an agreement with a lender to ensure a solid understanding of the information being presented.

    Below are some financing terms that are commonly used in the personal loan arena:

    • Credit history: a record of how a consumer has borrowed and repaid debt. Commonly referred to as your credit report.
    • Lender: the entity that makes funds available for borrowing.
    • Debt: money that is owed from a borrower to a lender.
    • Asset: an item of ownership that has exchange value.
    • Collateral: the pledge of an asset to a lender to secure repayment of a loan.
    • Fair Market Value (FMV): the amount something would sell for in the open market.
    • Term: period of time between the initial procurement of the loan and the time the loan is to be paid back in full.
    • Equity: the difference between the fair market value and the level of indebtedness.
    • Home equity: the difference between themarket value of a home and the outstanding mortgage balance.
    • Home equity line of credit (HELOC): a type of secondary financing that consists of a revolving line of credit
    • Home equity loan: a type of secondary financing that consists of a single loan amount.
    • Interest: the cost of borrowing money.
    • Interest rate: percentage of a loan that will be paid back as interest.

    Types of Personal Loans

    The changes in the economy over recent years have prompted lenders to restructure their standard lending practices, offering a wider array of personal loans to meet the average consumer’s financial needs.

    Each type of loan has advantages and disadvantages. Choosing the right type of loan depends on the individual and his or her lifestyle. Borrowers should consider the importance of the desired loan versus current credit standing.

    The seven most common types of personal loans are:

    • Home Equity Personal Loan: finite amount secured by the equity in your home.
    • Home Equity Line of Credit (HELOC): revolving amount taken as needed and secured by the equity in your home
    • Short-Term Personal Loan: taken when funds are needed urgently
    • Fast Cash-Advance (or Payday) Loan: taken when funds are needed immediately
    • Military Payday Loan: specific to men and women in the military
    • No Credit/Bad Credit Personal Loan: for consumers with a bad or limited credit history
    • Second-Chance Personal Loan: for a financial crisis or personal tragedy

    Better Choice: Secured Or Unsecured Personal Loan?

    There are benefits and drawbacks to both sides of the argument over whether to take a secured or unsecured loan, but the final decision comes down to answering two questions:

    • Do you have a piece of valuable piece of collateral, typically a home or automobile?
    • Are you willing to risk losing that asset if you can’t make payments on the loan?

    If you can answer “Yes” to both questions, a secured loan is the route to take. There are many more benefits to a secured loan for the obvious reason that you stand to lose a lot if you don’t make payments. Additional benefits include:

    • It’s easier to qualify for a secured loan because you have collateral.
    • You should receive a better interest rate. The collateral used to secure the loan has value, which makes you less of a risk. The lower the risk, the lower the interest on the loan.
    • You should be able to borrow more money, based on the value of the collateral.
    • You may not need a job. Lenders definitely prefer the borrower to have a job, but if the reason for the loan is a job loss, then employment is less of a factor so long as there is good collateral backing the loan.

    The primary benefit of an unsecured loan is that you won’t lose any assets, meaning home or car, if you can’t make payments. Additionally, unsecured loans are easier to dismiss should you ever have to declare bankruptcy.

    Applying for a Personal Loan

    The application process for personal loans should be easy, as long as you answer the questions in detail and can verify your work and credit history.

    Before you start filling out the application form, take a few minutes and answer some questions that will help make this a productive exercise.

    • What is the purpose for the loan?
    • What is your credit score and what type of interest rate do you expect to receive based on that score?
    • How much are you going to borrow and can you comfortably afford the payments on that amount?
    • How long a repayment schedule can you handle and do you want a secured or unsecured loan?

    Once you have the answers to those questions ready, gather some documents that will help speed the process. You may need tax returns, checking and savings account information, deeds for property and titles for cars. You may need all or parts of that list, depending on the size of loan you’re seeking.

    Finally, you will need the usual personal information – name, age, address, social security number and contact numbers – and something to verify each one.

    The truth is that many loan applications are rejected simply because the borrower didn’t have the necessary paperwork to verify their situation to the lender. Get your paperwork together BEFORE you start filling out the application.

    One more bit of advice: Shop around. It may feel you’re begging for help when you start the process, but the truth is, you’re the customer. If the lender wants your business, they will work with you to get a deal done. If not, keep shopping.

    Taking Out a Personal Loan: Banks vs. Credit Unions

    The most common sources for obtaining a personal loan are banks and credit unions. Both have positives and negatives, and it’s up to the borrower to decide which option is best.

    It’s important to know the difference between a bank and a credit union. A bank is a for-profit corporation owned by private investors, whereas a credit union is a not-for-profit establishment owned by members of the union. While a board of directors governs both, the stockholders choose a bank’s board. A credit union’s board is selected by its members.

    Although banks have been a more accessible borrowing option in the past because of the large pools of capital they manage, credit unions are growing in popularity among consumers. Recently credit unions have become competitive with banks, offering lower fees and higher levels of service. In addition, membership in credit unions has become much less restrictive, making them available to a larger and more diverse population.

    Personal loans can be a great financial resource if their purpose is well thought out. Understanding the types of loans available, the unique features associated with them, and the terms and agreements are paramount in making educated decisions regarding finances.

    When considering a personal loan, consumers must know the facts. Borrowers should be familiar with their credit report so they can decide which personal loan is best for their needs, and which types they will qualify for. Also, it’s important to consider future income changes as they relate to the repayment of the loan.

    Personal Loan Scams

    If you have limited financial experience, or are a trusting soul, you are a target for scam artists.

    Scam artists take advantage of the most vulnerable members of society, stealing millions of dollars every year from unsuspecting people who thought they were getting a good deal on a personal loan.

    If you aren’t experienced at borrowing money, be cautious at all times, whether you’re talking to a lending institution down the street or an online lender offering you a deal that seems too good to be true. It probably is.

    Here are things to watch for when you go looking for a personal loan, especially if you’re responding to an advertisement or to an online lender.

    • Advance payment fees. The lender will ask for a fee to review or process your loan. They may refer to it as an application fee, document fee or even an insurance fee, but legitimate lenders don’t ask for money in advance of giving you a loan. They disclose all fees and usually roll them into the cost of the loan.
    • Wire transfers. If the lender tells you to wire money for the fees he proposes, that is a problem. Verify the business name and a physical address for the lender to be sure it’s a legitimate business. Never wire money to an individual.
    • Guaranteed loan. There are some lenders who will call or send invitations to apply for a personal loan with a “guarantee” that you will be approved. Ignore them. The guarantees can’t happen until your credit score and financial situation have been evaluated.
    • Interest rate inflation. The interest rate for nearly every loan is determined by some combination of credit score, amount borrowed and repayment schedule. Inflating the interest rate by just a point and stretching the repayment schedule a few years can be very costly to borrowers.
    • Companies with copycat name. It is common, especially online, for scam artists to create a company name that sounds and looks familiar, but is a fraud. It is crucial to verify the business name and address before signing on with a company.
    • Personal information requests. Be careful not to give your date of birth, social security number, checking account number or any other important personal information unless you’re positive you’re dealing with a legitimate lender. Otherwise, you open yourself up to things like identity theft or having money stolen from your bank account.

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    Author

    Bill Fay
    Staff Writer

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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