I. Overview of Topic
(For an overview of major Payday Loan companies,
click here).
Unsecured personal loans online or offline can be quite expensive. According to BankRate.com,
the cost is currently over 14.5% per year, if you get a personal loan from a bank. And that's about your best rate - try borrowing against a credit card, for example, and it could be even more.
Sometimes, though, a personal or payday loan is just about unavoidable for many of us. The car dies and you need an expensive engine repair to get it up and running again - without the car you can't get to work. Your daughter needs braces. The washing machine makes a strange buzzing noise then shuts off.
If you're like many Americans when situations like these occur, you have to get emergency cash somewhere and a personal loan online may be the fastest and most practical solution. If so, you're not alone - personal loans now make up over 22% of the total nonmortgage installment loans at U.S. banks, up from only 11% in 1998. Personal loans online comprise almost half of these.
However, before you panic and call a number you see on a telephone pole sign, advertising "QUICK LOANS - NO CREDIT CHECK," let's consider some options you might not have thought of. Are there some sources of cash you haven't considered? Here are a few possibilities to consider --
- Borrowing against your cash value life insurance policy. This is a low-interest alternative if you have this type of policy, and it's the most common type.
- Sell investments. If you own stocks, Treasury bonds, etc., this is a quick way to drum up some hard cash - just be sure you understand you'll have to pay taxes on any gains or interest.
- Borrow against your retirement account. Check with your employer's benefits department to see if this option is available. If so, it's another low-interest alternative.
- Home equity loan. If you own a home with equity in it, you can borrow against the equity at a fairly low interest rate and at the same time get a tax deduction. A good resource for home equity loans is Lending Tree
- Friends or family. Heck, if you can borrow from dad maybe he won't charge any interest at all. Just be sure to pay him back.
- You might try asking your employer for a pay advance - assuming you have an understanding employer.
- Same with your creditors - especially local mercants who may be more flexible. Might they be willing to extend your payments a month? If so, make sure you're not getting charged extra for the privilege of paying your bill late - or if you are, find out how much.
Good Debt and Bad Debt
In his book, Personal Finance for Dummies, Eric Tyson makes an important point: You should never borrow money for consumption. That's bad debt. You should only borrow for investments that will increase in value (and increase by more than the cost of the loan). Taking out personal loans online just to spend the money is a terrible idea, a royal road to bankruptcy or other financial land mines. As Tyson says in his book:
If you spend, say $1,500 [which you've borrowed] on a vacation,
the money is gone. Poof! You may have fond memories and even
some Kodak moments, but you'll have no financial value to show
for it... I'm not saying don't take a vacation. By all means, take
one, two, three, or as many as you can afford yearly. But that's
the point - what you can afford. If you have to borrow money...
[then you can not afford the vacation]...
And of course, exactly the same advice applies to virtually any consumer purchase: clothes, expensive meals, home computers, yes, even a new car - anything that decreases in value and eventually becomes financially worthless. If you have to borrow to buy it, you probably can't afford it. According to Tyson "The financially healthy amount of bad debt [you should have] is zero."
This doesn't apply, however, to things that "retain and hopefully increase in value over the long term, such as an education, real estate, or your own business." For these uses, debt is acceptable, up to a limit - the limit being the point at which making payments causes you to be no longer able to save sufficiently to accomplish your future financial goals.
Good advice, but let's face it: Sometimes, you simply may not be able to avoid adding to your debt load - an emergency or other urgent situation forces you to seek a personal loan. In those situations, what are your best options?
Personal Loan Basics
Here are a few basics to keep in mind whenever shopping for an unsecured personal loan:
First, never borrow more than you absolutely have to. Given the high interest rate you'll have to pay, keep the amount to a minimum.
Second, compare terms from several lenders. Don't look at just the monthly payments - consider the total cost of the loan, inlcuding any hidden charges like credit insurance or other fees. Be sure to read the small print on the loan agreement. Never assume what you're being told verbally by a loan officer is binding. It's what's in writing in the contract that counts.
Third, always try your credit union before a bank. Credit unions generally have more favorable terms than banks and are often willing to make small unsecured personalloans to members.
Fourth, don't pledge valuable assets when you take out a small loan - it's not worth the risk. And avoid using credit cards or payday loans if at all possible - the interest rates, especially on the latter, can be prohibitive.
Fifth, note that interest paid on unsecured personal loans is not tax deductable.
Subprime Loans
If you're in the subprime lending category, everything becomes more complicated when applying for personal loans online or offline. As you know, subprime lending has tightened up tremendously over the past months (especially in the mortgage market). However, if you are employed, you can still find emergency cash - you just have to be prepared to pay a steep interest rate for it.
What exactly consititues "subprime"? The definition varies by lender, but generally subprime means a FICO score of 650 or below. Other criteria include a bankruptcy within the past five years, a foreclosure within the past 24 months, or a debt-to-income ratio of 50% or higher. Some conservative lenders will even brand you as subprime if you've been late on one or one or two credit card payments over the past 12 months.
There are a couple important factors to bear in mind if you find yourself considered subprime and yet need to find an emergency personal loan. One is to recognize that you'll be viewed differently by different lenders - you don't have to jump at the first ridiculous offer you receive. Shop around. As said, be sure to try your credit union - and also one or more banks that have departments providing subprime lending. Try using one of the online services that allow you to apply at several lenders simultaneously, like Lending Tree
Several important caveats for subprime borrowers:
- Avoid personal loans online which involve "fancy" terms like balloon payments. Avoid adjustable rate loans (these have proven disastrous for thousands of subprime mortgage borrowers and can be almost as disastrous for personal loan borrowers).
- Never risk a valuable asset in order to make a small loan.
- Don't allow several lenders at once to access your credit report - several inquiries on your credit report within a short period can further lower your credit score.
- Read the fine print. Make sure you understand the terms of the loan clearly. You will be held to what is in the contract, no matter how much eye-strain it takes to read it.
That's it - our ten minutes are up! (OK, maybe twelve or thirteen.) Below is a listing of Web resources to help you
continue your research on personal loans online.
II. For Additional Research
This Section provides reviews and recommendations of Web sites and other
online resources. See also our Payday Loans & Other Unsecured Loans Consumer Report.
A Listing of Reputable Payday Lenders
I've reviewed over two dozen payday-lenders' sites and done some Better Business Bureau and online checking -- the following appear the most reputable and easy-to-use to me --
We Give Cash will wire $1500 into borrower's bank account within 1 hour. Has a no-fax approval process. "Bad Credit Okay. Easy Five Minute Application. Results in Minutes. Direct Deposit Not Required."
Payday One promises "Great rates and no wait...
Get an answer in seconds... Licensed in all States... Highest customer satisfaction."
Magic Payday's site promises "Cash Loan By Tomorrow...
Up to $1300... Confidential... Instant Approval... No Paperwork."
LENDING TREE
Lending Tree is one of the best-known loan company aggregators on the Web. You can use it to get bids from mortgage lenders, home equity lenders, auto loan companies, as well as personal loan companies. I think if you're looking for a personal loan this is a good resource to use. For one thing, the Lending Tree site offers an excellent tutorial on the subject (see "Personal Loan Basics"), and, what's more, you'll probably get offers from several companies, allowing you to compare terms side-by-side. Just go to Lending Tree, and click on "Personal Loans" on the left side of the page. You may not find the loan you're looking for here, but it's a good place to start your research.
Personal Finance for Dummies
Personal Finance For Dummies' coverage of personal loans online is minimal, admittedly, but if you want to get your financial house in better order, try this book for expert guidance on tax planning, mutual funds, stock investing, and personal financial planning. Personal Finance for Dummies by Eric Tyson is available through Amazon via the banner under "Recommended Reading" below.
Recommended Reading
III.Discussion
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