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June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
When you take out an auto loan you buy an auto. With a home loan you buy a home. So what do you use a personal loan for? Just about anything you please -- a big trip, computer equipment, plastic surgery, a piece of art, you name it. The list of potential sources for a personal loan is not quite as long as the list of possible uses for the money, but there are quite a few options, and each one offers its own advantages.
Because credit unions are nonprofit member organizations, they may charge lower fees and rates on their loan products. That's good news for millions of Americans, since nearly one third of the country's population belongs to a credit union.
Generally speaking, personal loans for less than $10,000 are unsecured and, as such, will carry a higher interest rate than, say, a home equity or auto loan. Nonetheless, if you're shopping for the best possible interest rate on this type of loan, a credit union may be a good place to start.
Since the loan process can be somewhat subjective, the bank where you do business is not a bad place to start looking for a personal loan. If you've handled your bank accounts responsibly, your banker may be swayed to approve a loan that is approaching the upper end of the debt-to-income ratio. Likewise, your long-term employment with a strong local employer that your banker is familiar with may weigh more heavily in your favor than one or two late payments on your credit report weigh against you.
Friends and Family
It's never a great idea to borrow money from friends or family, but done right, the arrangement can actually be mutually beneficial, providing the needed funds for one party and competitive interest earnings for the other.
One of the keys to this type of truly personal loan arrangement is to put all the provisions down in writing. You should draw up a document (to be signed by both parties) that clearly states the amount of the loan, the interest rate, the monthly payment, the due date, and any late fee that might apply.
Credit Card Companies
Many credit card companies offer prospective customers a card with a very low fixed promotional (or "teaser") rate for a number of months, which can function essentially the same way as a short-term loan for an amount up to your credit limit. If the promotional rate is for, say, three to six months and you need the money for a longer period, don't be shy about calling up the card issuer and asking if it offers a longer-term fixed rate. Some companies will offer the longer term, but will also bump up the rate a bit.
Keep in mind that the promotional rate may or may not apply to both cash advances and charges. Be sure to read your credit agreement thoroughly to fully understand the terms of the credit, particularly when it comes to interest rates and fees for different uses.
Peer-to-Peer Lending Sites
These sites allow you to borrow money from other people over the Internet for interest rates that are often lower than comparable loans from a bank or credit card company.
A Couple of Ways to Save on Finance Charges
If you want to pay the loan off early, two items you may want to avoid are prepayment penalties and interest terms based on what's called the Rule of 78s, or "the sum of the digits," meaning the loan is front-weighted for interest. In other words, you're going to pay the majority of the interest in the early stages of the loan, when you're using more of the lender's money. Under these terms, trying to pay off the loan early is less financially rewarding for you.
The Truth in Lending Act requires that your lender disclose whether or not you are entitled to a rebate of a portion of the finance charges if the loan is paid off early. Ask for an amortization schedule so you can clearly see what portion of each payment goes to principal and what portion goes to interest at every stage of the loan.
While there are a number of options available when you need a personal loan, take the time to research each one. In the long run, you will be glad you took the time to get the loan that offers the best terms for you.