|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Banks are Getting Personal Again - Is a Personal Loan for You?
Things must be getting better. Driving around you can see more banks promoting personal loans. Just a few years ago, you would be hard pressed to find a bank actively promoting personal loans, or “signature loans” as they are also called. Credit was very tight, and people were nursing shaky credit reports. That seems to have changed and personal loans are rising in popularity among people looking for a quick infusion of cash to consolidate debt, pay for a wedding, start a business, or any number of reasons. Just what is a personal loan and how do they work? We explore it in depth.
What exactly is a Personal Loan?
Also known as a signature loan, or a character loan, it’s an unsecured loan obtained through a bank or lending institution that only requires a borrower’s signature. These loans, issued up to $25,000 or higher in some cases, can be used for any purpose and are usually repaid over a one- to 5-year period depending on the amount of the loan and the credit standing of the borrower. The interest charged can range from rates that are equivalent to home equity loans (3%) to as high as 25%, again, depending on the borrower’s credit. Generally, the lowest rates are reserved for people with excellent credit.
Why Use a Personal Loan?
For people with good credit who need an influx of capital, a personal loan can be a better alternative than a credit card if they can obtain better loan terms. Or, they may not have the credit available on their existing lines of credit. With many banks or credit unions, you can walk in, apply for a personal loan and walk out with cash in your account. So, it’s quick and convenient. A common use for personal loans is debt consolidation, which would make sense if you could reduce the total cost of your debt. But, if you wind up defaulting on a personal loan it could significantly hurt your credit.
For people with sketchy credit, a bad credit loan can be issued quickly as well, but they will be looking at high interest costs and higher fee costs. A personal loan is a much better alternative than a payday loan, which is designed for a very short-term need for cash. Most banks won’t issue bad credit loans, so these would have to be obtained from a finance company, many of which are available online.
Getting a Personal Loan
Many banks and credit unions make personal loans available to customers with good to excellent credit histories. You won’t need to put up any collateral, such as your savings, just your signature. But you will need to be able to document your financial situation and provide income verification. In addition to a credit check, the bank will want to review your personal balance sheet and cash flow situation. You may have to provide an employment reference as well as some personal references. If approved, your loan can be funded as soon as one business day.
While it’s good to see the banks lending again, you should carefully consider whether a personal loan might be the best option for you. As with any type of credit product, it’s important to not only study the fine print, but also to know your capacity to repay the loan.
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