The Raw Deal: Personal Loans

May 12, 2011Personal Financeby Liz Zuliani

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The Raw Deal: Personal Loans

You know, I’ve heard about personal loan offers and promotions but never looked into one. This week I wondered, what’s the difference between a personal loan, a cash loan and a plain ‘ole credit card (apart from the fact that you don’t want a cash advance at 18 percent compounding interest on your Visa thank-you-very-much). And, when should I use a personal loan over a cash loan or credit? 

Well, the first thing I found out is personal loans have lower interest rates than cash loans and credit cards (win!). But banks do expect you to have a superb credit rating to lend you the money (dang). Banks are less fussy about a bad credit rating if you’re applying for a credit card, but it doesn’t give you as many spending options. 

On small amounts and if you need cash urgently, it shouldn’t be too hard to jig around your cash and expense on your credit card - but watch out. It turns out you spend 12 percent more when you swipe.

Cash loans now are essentially payday loans now. The interest is exorbitant, but you don’t feel it as much over a 24 hour or 48 hour period which is basically what they’re for. If you need the money that badly, I say ask your boss to pay you a day early and offer him the $50 interest. It’ll cost you less and he’ll hardly shoot you down. 

The other difference between a loan and credit is that personal loans are split into two categories: secured and unsecured. All it means is your lender will want to prop your borrowing against an asset, like a car or your house. In the case of a secured loan (if you qualify with a slick credit history!), you’re bound to benefit from low interest rates. Unsecured loans will charge slightly higher interest. 

Borrowers beware: Pay your bills on time or face stiff late charges and penalties. Personal loans are more strict when it comes to repayments.

What’s interesting is the fact that more Americans are taking out personal loans according to a report on Digital News as people look for low interest alternatives for borrowing. Tight credit and poor economic conditions has increased the demand for personal loans. 

HSBC recently announced unsecured personal loan rates starting at 6.99 percent. Not bad. SunTrust did better with 3.99 percent and Nationwide Bank came out with a 6.45 percent rate. The loans are being used for refinancing vehicles for homeowners mainly. 

Personal loans have become increasingly popular since the financial crisis. American banking news reports:

Lending Club, a peer-to-peer lending company, has now originated more than $255 million in loans to consumers. The news comes just three months after the company announced that it had surpassed $200 million in loan originations. As of April 16th, Lending Club’s statistics page showed that $255,003,975 had been setup by the company.

Peer to Peer lending

Infographic Source: CreditSesame

Okay, so when should I use a loan and when should I use credit?

Essentially: If you need a lump-sum loan with fixed payments over a period of time, go for a personal loan. If all you need is a line of credit you can tap from time to time, a credit card or line of credit is your answer. 

You’re going to need a good credit rating and an asset to secure your loan against and get a good rate in the case of a personal loan. It’s better for large sums (such as refinancing yourhome loan or car loan). 

A line of credit is more flexible, and you sure have to be responsible not to get into trouble with it (and you know what I mean), but the interest rates are higher, so look for a good deal before you sign up. 

Have you used a personal loan, and was it better than credit or harder to manage? Share your experience with us below!

Want more info on loans and credit cards? Check out EconomyWatch Loans and Credit Cards for the raw deal and more!

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