Personal Loans

As credit card companies raise fees, cancel cardholder accounts or cut credit limits, people who need credit are looking to alternative financing methods. Personal loans, offered at a fixed rate for a specified term, are increasing in popularity. You might consider this option if you need money for a purchase or to help out in a financial emergency.

These loans are unsecured, requiring no collateral except your good credit rating. Personal loans do not have the fees and traps that we have come to expect from credit card companies. You borrow a specific amount, at the disclosed rate. You know how much you will pay each month and for many months you will make payments.

Since the loans are unsecured, the interest rate will be higher than loans collateralized by savings, personal or real property. However, the rates are much lower than credit cards. In fact, some borrowers are using them to pay off high interest credit card accounts. This is a recommended way to repair bad credit.

While banks and credit unions are the usual lenders, some unexpected loan providers have gotten into the market. USAA, best known for offering insurance products to military members, offers an unsecured personal loan of up to 48 months with an annual percentage rate as low as 12 percent for customers with an excellent credit history. Discover Card offers its customers personal loans of $25,000, giving them the option of how much they want to pay or how long they want to make payments. Citibank, Capitol One and Bank of America have in the past had similar personal loan programs available, although both Capitol One and Bank of American are scaling back the availability of the loans.

Many banks, credit unions and financing companies have continued to actively solicit consumers with offers of personal loans. In a single quarter, as many as 80 million such solicitations can be sent out. However, consumers need to be wary of being sold on the idea of a personal loan. Like any other debt, personal loans can be abused. Consider the offers carefully, and negotiate the best interest rate. A lower interest rate will mean a lower monthly payment.

Credit unions remain the most affordable option for borrowers. In a recent study done by Filene Research Institute, a Madison, WI credit union think-tank, found that a 36-month unsecured consumer loan offered by banks had an average APR of about 13.8 percent, while credit unions averaged about 12.1 percent.

While an unsecured personal loan can be a good way to pay off higher-rate debts or repair your credit score, it must be handled responsibly or it will hurt rather than help your financial well being. As with the use of any credit, cash from personal loans should only be used for necessities. Do not use it to for a weekend shopping spree or a vacation you cannot really afford. Before you apply for the loan, make sure your budget can afford another payment. Then make the payments in full and on time.