While not the first option to turn to, personal loans have become readily available and may be the right option for some consumers. More than one dozen non-bank companies currently offer personal loans in the U.S., competing directly with traditional banks and credit unions. These personal loan companies and bank lenders are an alternative to payday loans and other higher-priced debt, and they can help people who are in credit repair by allowing them to consolidate their debts at lower interest rates.
Taking on consumer debt is difficult for most people. For most of us, we only borrow when we really need to. However, creditors give their best rates to people that have more assets and income. It sounds odd, but it’s true. The more money you have (or earn), the more money lenders will lend you--and at a lower interest rate. So, most people are risking a lot when they take out personal loans or any kind of debt. It’s important to do your homework before you borrow because it is surprisingly easy to get in over your head and hurt your long-term credit health.Below we offer a side-by-side comparison of several lenders as well as some insights for you to keep in mind. Remember, this is not an exhaustive list of personal loan companies and you should always do your own additional research before choosing to use personal loans or any specific financial product or company. We also suggest you use research-based sources like the Better Business Bureau and Consumer Reports
When should you use a personal loan, and what are the potential benefits and drawbacks?
As a rule of thumb, if you must use credit, look for the cheapest credit you can get from a reputable lender. Also, make sure that the type of credit product you use fits your borrowing needs. For example, if you have high-interest rate credit card debt, a personal loan may be a good option for you. The same may be the case if you are struggling with payday loans and have a “fair” credit score or better. On the other hand, since the costs of most unsecured personal loans are higher than many types of secured loans, you wouldn’t want use a personal loan to replace a home mortgage or as an alternative to an auto loan.
The other thing to remember about personal loans is that this product fits between traditional secured bank loans and the payday-type loans in terms of price. If you are able to get a lower-priced bank loan with better terms than a personal loan, you should consider choosing that lowest-price option. On the other side, personal loans are often less costly and less risky than taking payday loans or using title pawn.
How is the best way to take advantage of a personal loan? Some final quick tips:
At TheMoneyShelf, we believe that financial literacy can help people prepare for their future and make the most out of their economic opportunities. Be sure to check out our other articles, research, and our large list of finance-related books.
John Florio, MBA