While some lenders offer low interest rate loans, others are tightening credit requirements for borrowers.
Here’s what you need to know about taking out a personal loan during this crisis and whether or not it makes sense for you.
An unsecured personal loan is money borrowed from a bank, credit union, or online lender that can be used for anything. The money is repaid in installments over time, usually with a fixed interest rate.
While many experts caution against personal loans, which often come with high interest rates and fees, they could make sense in an emergency.
“Ideally, I hope people use relief programs before they get into more debt,” said Justin Pritchard, certified financial planner at Approach Financial in Montrose, Colorado. “But if you absolutely need to borrow, a personal loan is not the worst solution.”
Since the loan is unsecured, you don’t need to give any collateral, which helps you avoid putting your home or other valuable assets at risk, Pritchard said. “Plus, you don’t plunder your retirement savings or withdraw money from accounts like a 401 (k).”
The fixed interest rate on most personal loans also lets you know exactly how much you are paying each month and when you need to pay off the debt, he said, which is useful compared to credit cards, which often have variable rates.
But interest rates on personal loans can also be very high, he warned.
“Some personal loan rates are over 30%, so you don’t necessarily get a lot,” he said. “Plus, there may be origination fees on top of your total cost of borrowing, and you don’t get a break if you pay off the loan early.”
What it takes to get a loan
While various lenders will offer loans to those with poor to excellent credit scores, it is difficult to find a lender who will grant a loan without having demonstrated their ability to repay it.
“Lenders are looking for the borrower’s ability to repay this loan,” said Elisabeth Kozack, general manager of loans at Marcus by Goldman Sachs. “Lenders want to verify the source of your income. It could be employer income or military income, retirement income, benefit income.”
Your credit score and payment history will also be factored into your loan offer.
When shopping for loans, she recommends determining the amount you need and the type of monthly payments you want to make. And factor in the interest rate as well as overall benefits like lower fees or flexibility in payment dates.
“The interest rate will generally be higher for long-term loans and lower for shorter-term loans,” she said.
Explore your options
Think about a loan holistically, including fees and interest. A set-up fee isn’t necessarily a bad thing if you can get a lower rate and spend less on interest plus fees over the life of the loan.
“If you’re paying an origination fee, be sure to factor that into the amount you’re claiming,” Pritchard said. “Lenders can reduce your loan proceeds to cover origination costs.”
He recommends getting quotes from at least three different lenders. A diverse sample would include a local bank, a credit union, and an online lender.
“Credit unions, with their community orientation, might be more willing to work with you if your finances aren’t ideal,” he said.
If you’ve explored your options and are deciding between a personal loan or credit cards, check with your bank or credit union to see if they offer an economical relief loan, said Luis F. Rosa, certified financial planner. at Build a Better Financial Future in Las Vegas.
“You have to factor in the fees and the interest rate after the introductory 0% APR is finished,” Rosa said, “but if this is a short-term solution, it could be a solution. good option. “