Looking for a little extra cash? Some consumers who find they need a small amount to fix the car, buy a new washing machine are passing up home equity loans or credit card charges in favor of small, closed-end, unsecured personal loans. According to the latest data, such loans make up more than one-fifth (22.1 percent) of the nonmortgage installment loans on the books at the nation's banks, up from 10.9 percent in 1998.
Unsecured personal loans are not that popular with banks, the preference has been for credit card products. But using a credit card, which typically carries a much higher rate for a short-term loan is probably not the best option for the typical consumer. The problem is you need a lot of discipline to use a credit card as a loan. Pay the minimum payment and you won't pay it off for decades. And treating the transaction like a loan, figuring out the payment needed to pay it off in a set time period is very hard for people to set up and maintain.
First things first. Decide how much money you really need. Better question -- what's the least amount that will get you through? And have you considered other alternatives to borrowing? Once you decide how much you need, start shopping. Call around. Find out what the terms are for personal loans. A lot of people might not think of financial institutions [like banks and credit unions.] Instead, their first stop might be a payday lender, and they have considerable rates.
So what kind of rates can you expect to see? Terms on two-year bank personal loans are averaging above 11.8 percent, according to the most recent (February 2004) numbers from the Federal Reserve. Credit unions might have an edge over banks when it comes to small loans because they offer smaller rates. Ninety-six percent of credit unions offer short-term unsecured loans. The average amount borrowed is roughly $2,300. In addition, at least one-fifth of credit unions will make loans under $500 with just a limited credit check.
Sometimes, loan officers will try to talk borrowers into taking a little more money than they had originally planned to take in a personal loan. That may be because the officer gets a commission based on the loan amount because state regulations are looser for larger loans.
In addition, some institutions may handle unsecured personal loans by proffering credit cards. But credit cards are a different situation entirely for borrowers. Often, rates are not fixed and may change during the course of the loan. And credit cards are revolving credit, meaning the borrower and lender don't set a fixed period to pay them off. While that may sound like a great deal initially, it could be a lousy deal years later if you end up carrying a balance at 21 percent. Instead, opt for a specific loan amount with fixed monthly payments and a finite repayment schedule.
And learn from the experience. This might be the perfect time to sock away some money for the next rainy day instead of getting a personal loan.
