Benjamin Franklin once said if you really want to understand the value of money, go out and try to borrow some. He said it long ago but it's still true! And if you want to understand that value really well, look for a personal loan.
Personal loans are basically loans that are made without any sort of collateral. Collateral is something the bank or other lender could take from you if you failed to make payments. Easy examples of loans backed by collateral are car loans — hence the repo threat. That is, the lender will come and seize your car if you don’t pay. Also home mortgages: the bank can foreclose and you will lose your house if you miss mortgage payments.
So collateral secures the loan. Without collateral, the loan is called an unsecured loan. It is based on confidence. A credit report and some other background information is all the lender can rely on to trust the loan will be repaid according to its terms.
If you own a car or a home you can probably get a reasonable rate on a secured loan at your bank or credit union. If you have no collateral consider an unsecured personal loan — but first learn more about them:
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If you're sure what you want is a loan, read on. If you'd like to see what types of grants might be available to you instead, take a look at our article about Personal Grants. And if you're looking for a loan to go to college or career school, get some great information and tips in Student Loans.
Update March 2018 Here’s nice new — or pretty recent —job perk: personal loans! The Wall Street Journal reported late last year that it is a growing trend among some employers. Some act on their own to offer low cost loans to current employees and a growing number are working with credit unions or non-profit organizations to make the loans. The employee has to have been on the job for at least a year. The employer vouches for the employee and takes loan payments out of the employee’s paychecks automatically. So financial lenders are motivated to charge lower interest rates and better terms. Sounds like a win-win to us. Ask your employer if they offer such a benefit or maybe they would consider it.
Update September 2017 For the latest about loans you can get to help pay for home repairs and improvement check out our recent article about Home Repair Loans – including those that do not require putting up your home as security.
Update August 2017
One area of government loans is beginning to be of concern. This is the PACE program, or Property Assessed Clean Energy. The program is managed by local governments throughout the country. They make it easier for people to invest in energy efficient improvements like solar panels and insulated windows and air conditioning. Apparently in too many cases contractors have promoted the loans quite aggressively, as they receive referral fees when they steer clients to lenders. Unfortunately they do not always (if ever) take into account the creditworthiness (or lack thereof) of these clients. Lenders appear not to worry about it much either because the loans depend on the value of the property — and the debt gets added to property-tax bills as an assessment. This can cause a too often unexpected, dramatic increase in a homeowners property taxes and eventual inability to pay. In the meanwhile rating agencies say they don’t have enough history to accurately predict defaults — and the bonds that are created from the packaging of these loans appear to some to echo the situation that led up to the housing crisis. If you are considering a PACE loan — which is typically attractive because no money down is required — be sure you fully understand the terms of the loan and how it will increase your taxes!
If you use a credit card you are taking out an unsecured loan every time you make a purchase. But perhaps you’ve run up too much credit card debt, one of the most expensive unsecured types of debt out there. Most unsecured loans are in fact taken out to reduce indebtedness, mainly for credit card debt. Not surprising because credit card interest rates tend to be quite high, and they are not fixed for long time periods.
Since the financial debacle of 2008, banks have been more cautious and less inclined to make personal loans. And consumers are more wary about — and distrusting of — banks. Thanks to our capitalist society that encourages competition, other players have come into the mix. And you now have many options if you want to consider an unsecured personal loan.
Before looking at lenders, consider how your loan-worthiness will be judged. Since lenders know there’s no property they can seize if you don’t make payments they look elsewhere to judge you. They will consider whatever they can to assess your character, your ability to pay, and the conditions (interest rate, length of repayment term, etc) you are willing to accept. And of course they will base a big part of their decision on your credit score. If your credit score is below 600 you will probably have a tough time and/or have to pay a higher than average interest rate. And beware any lenders who say no credit check is required — those rates are apt to be extremely high (like triple digits…) and collection efforts will be aggressive.
What about credit unions? Credit unions are an excellent choice and a great alternative if your kind of like the “feel” of a bank but want lower rates and an easier loan approval process. There are great credit unions all across the country and it’s so much easier now to become a member. Eligibility used to be much more limited but that has changed dramatically. Now you don’t usually have to work at a particularly company or even live in a specific county to qualify. For example, Consumers Credit Union is open to anyone regardless of where you work or what area you live in. First Tech Credit Union requires only that you make a charitable donation of $8 in order to join. And credit unions will have a lower interest rate than your typical bank…and definitely lower than an online lender.
With those warnings understood, here are some potential lenders:
Traditional Banking Style - but not a bank: f you don’t want to go to a bank but actually prefer a bank-style experience you might consider a loan from OneMain. They lend to people with lower credit scores, typically below 630 and averaging between 600 and 650. Borrowers have to have a minimum annual income of $20,000. They have more than 1800 branches and if you need money quickly they can sometimes get the funds to you the same day. They will do a hard credit check and that could affect your credit score. But they also provide free access to your score which not all lenders will do. Their starting percentage rate is 12.99% so if you can get a loan from a credit union that is probably a better bet. But OneMain would be preferable to a typical payday loan.
Online Lending Platforms:
Online lending platforms are internet based companies which grew out of people’s dissatisfaction with banks. They receive funding from investors looking for a reasonably secure way to earn better returns than what banks are paying. The lending platforms use those funds to make unsecured personal loans. They usually require a minimum acceptable credit score for a borrower, with interest rates closely tied to what the borrower’s credit score is. Rates are better than credit card rates but not as good as you can get for a secured loan or one that you might get from a bank or credit union what knows you well.
Lending Club is the largest and one of the original online lending platforms. They have been in the news lately since their founder and CEO was forced out of the company due to lending practices that did not meet the company’s requirements. Though these did not have a big financial impact they do not increase investor trust — quite the opposite. But Lending Club will most likely weather this storm … and in fact they might be eager to provide favorable terms to keep business from falling off. They do require solid credit with a score of at least 600. They will also look at your debt-to-income ratio. Their interest rates vary from 5.99% to almost 36% depending on how you measure up in these areas.
Prosper is the next largest online lender. They have a slightly higher credit score minimum of 640 but are a little more lenient when looking at numbers like recent credit inquiries and the amount of debt you carry.
Peerform is one to consider if your credit score isn’t in the upper ranges. It will consider scores of 600 and above and rates run between just over 7% to a little above 28%. They will lend up to $25,000 and their longest payment term is just three years.
Banks If you’re wary of peer-to-peer lenders and are willing to consider a bank, you might want to look at Wells Fargo. They compete pretty aggressively for loans and might be a good bet if you have good credit. They will make loans up to $100,000 (minimum of $3000) charging 6.25% to 19.25%.
Your Own Bank is also a good place to start. If you have a good relationship with a bank or credit union, do check them first.
Payday Loans are not a good idea. Rather than helping to solve your debt problems they are most likely to make them even harder to escape from. And if you respond to a lender to claims no credit check is needed you'll probably be talking to a Payday Loan outfit. Beware. See more, along with some alternative ideas for getting some cash, in Grants to Pay Bills.
Evaluating Unsecured Personal Loans
When looking for an unsecured personal loan take the same steps you would for any type of loan:
- Shop around — there is a lot of competition out there now and you can benefit from it.
- Look carefully at the terms of the loan: the interest rate of course but also the length of time you have to repay;
- Be aware of all fees involved: many lenders charge a loan origination fee and there may also be a fee if you pay a loan back early;
- Check up front to see if an online lender can do business in your state;
- Note the minimum and maximum amounts a lender is willing to approve.
Crowdfunding: If you are trying to raise money for personal reasons or to get your new business off the ground and you have a good story to tell, you might also try crowdfunding. This is a little like the personal lending sites except people are not loaning you money, they are giving you money because they want to support what you’re doing. The money you raise is not a loan but it is taxable as income. And you must be good at telling your story! Learn some more about Crowdfunding.
New options are turning up all the time! Check back here regularly to see news updates and what new programs competitors may be offering.