Personal Loans

Personal loan introduction

As the economy continues to improve, an increasing number of people are finding the need for small lump sums of cash to help them improve their own situation. Many are looking to consolidate more expensive credit card debt and a record number of budding entrepreneurs are looking for some start-up capital for their new business. And, after pulling up the welcome mat on borrowers as result of the financial crisis, banks and other financing companies are getting back into the personal loan business to accommodate the growing number of people looking for a quick capital infusion.

Also referred to a as a signature loan, a personal loan is an unsecured loan issued to credit worthy borrowers with nothing more than a signature. Personal loans are issued by banks, credit unions and a growing number of online finance companies for up to $25,000 with a one to five-year repayment term depending on the amount and the credit standing of the borrower. Generally, the interest rates charges on personal loans are lower than those charged on credit cards in the range of 3 percent to 16 percent with the lowest rates reserved for the most credit worthy borrowers.

Personal loans don’t always come cheap. The fees, which can include a broker’s fee, an origination fee, processing fees, and a payment security fee, can add up quickly. Some loans include a pre-payment fee. They’re not unlike mortgages or auto loans in this regard, so it is important to really study the fine print to determine your total costs for the loan.

Why Use a Personal Loan?

If you have very good to excellent credit, a personal loan can be a better alternative than credit cards for funding a one-time expenditure. Much depends on the terms of the loan, but, generally, they can be less expensive over a three to five year period, especially if you tend towards making minimum payments on your credit cards. With a personal loan, your monthly payments will likely be higher because you are paying a portion of principal along with the interest, and the terms are fixed.

If you use a credit card for a big purchase, you risk running up your debt-to-limit ratio which can hurt your credit score. Some people are tempted to make a big purchase through a 0% introductory period credit card offer with the intent to pay the balance in full within the six or twelve month period. Of course, the risk there is that you don’t pay off the balance and you begin to incur interest charges as high as 19.99%.

What is the Process for Getting a Personal Loan?

Generally, personal loans are fairly easy to obtain. The application process is straightforward and, in most cases, you will need to attach an income statement along with verification. Once known as “character loans” because they were issued, in large part, based on the character of the borrower, personal loans are no different requiring, in most cases, personal and professional references to vouch for your character.

If you work with a bank or credit union, your application can be processed that same day with money transferred to your checking account by the next day. Online finance companies might take two or three days to process your application and deposit funds.

What’s the Best Place to Get a Personal Loan?

The traditional sources for getting a personal loan are banks and credit unions, although they have tightened up on their qualifications for approval. You can expect most banks to restrict personal loan approvals to their very best customers. Credit Unions tend to be somewhat more liberal in their qualifications but you will still need good to excellent credit. While it is possible to get a loan with only fair credit, you can expect to be charged rates equivalent to those of high-rate credit cards.

Online financing companies have proliferated in the last several years, and while they can be a source of standard personal loans, they tend to specialize in “bad credit” signature loans, which are also unsecured, but their interest charges are significantly higher. These could be extremely costly loans for terms of a year or more. The only type of loan more costly, and one that should be avoided completely, are “payday” loans, call such because they should only be used to bridge your cash needs between paychecks. Failure to pay these loans off in their entirety can result in hundreds of dollars in fees and interest charges even over a short period of time.

Personal Loans from Digital Lenders

In an age of digital social networking, it shouldn’t be surprising that one of the fastest growing sources of personal lending is through peer-to-peer lending (P2P) sites on the Internet. A P2P site is a site that brings investors – regular people – together with borrowers – people who need unsecured personal loans. Investors benefit because they can invest in a diversified portfolio of loans to many different people; and borrowers benefit because they may not otherwise have access to personal loans with reasonable rates through traditional sources. Investors can generate a solid rate of return in the neighborhood of 6 to 10 percent in a low risk investment which is much better than investing in CDs that yield 1 percent. Borrowers have an avenue for loans from $1,000 to $25,000 that don’t involve greedy financial intermediaries that want to nickel and dime them to death. It’s a big win-win for both.

How does P2P Lending Work?

Also referred to as “social” lending, P2P lending works similarly to any social networking site, where people join a community. In this case investors mingle with borrowers to determine which ones present a good investment opportunity. Borrowers put up a profile of themselves that describes their background, interests, and their need for capital. The most common profile involves the need to consolidate debt. The next most common are for people with medical bills to pay.

Then there are the budding entrepreneurs in need of start-up capital. In all cases, they must submit to a credit check (conducted by the site authority) and be able to demonstrate their repayment capability. The site authority screens all prospective borrowers who must meet minimum guidelines in terms of credit worthiness and financial capacity. The site’s credibility is based on the lowest possible rate of default it can achieve. Only one in ten loan requests are actually accepted even among people with credit scores in the 600s and 700s. People with poor credit need not apply.

Borrowers are categorized by loan purpose and credit worthiness with a rating. People with only good credit, have a lower rating which translates into a higher interest rate. That might not be so good for the borrower, but an investor may be willing to take a bit more risk in order to receive a higher interest rate. The interest rates on loans range from as low as 6 percent to as high as 14 percent. The average loan rate is 13 percent. Investors can diversify their loan portfolio among different categories of borrowers to spread their risk, and can invest as little as $25 in any one loan.

Borrowers pay a minimal fee and there are no prepayment penalties. Best of all, the loan payments are reported to the credit bureau and can help to build your credit score.

LendingClub.com and Prosper.com are two of the more widely used P2P sites.

Conclusion

The good news is that more institutions are making personal loans available again. Your first consideration should be to determine whether you are better off with a 3 to 5 year fixed loan or a revolving credit line with a credit card. The size of the expenditure, its purpose, your credit score and your capacity to repay the loan are all key factors to consider. The lower your score is, the higher your cost will be. If you would rather avoid banks and online finance companies, social lending through P2P sites provides a very attractive alternative, especially if you need to borrower larger amounts. In all cases, it is vitally important to study the fine print of the loan documents before signing.

What are the options?

If the major lenders won't grant you a personal loan due to bad credit reasons, you will either need to improve your credit score (take a look at our tips for improving credit.), or alternatively, one of more of the following lenders may be able to help you, especially 'Prosper'.

	Prosper is a peer to peer lending service with loans up to $25,000
	Quicken Loans is America's biggest lender. All loans catered for.
	Spring Leaf finance can do personal loans of more than $10,000.
	60 Minute Payday specializes in instant loans of up to $1000.
	Read the reviews below...