Personal Loans

It would be difficult to find someone who has never taken out a loan. Car loans, home loans, school loans, and even personal loans are ingrained in our culture. Some folks are anti-loan, viewing them as tools to put people in-debt and ultimately dependent on the creditor. In theory, this is true. When someone takes out a loan, most times (by law), they are indebted to the creditor. But this isn’t necessarily a bad thing.

If loans cannot be paid back for one reason or another, the person who took it out is responsible. However, for every person who defaults on a loan, there are likely ten more who have been able to purchase something now that they wouldn’t have been able to do otherwise. There is a tremendous value to this, and we all recognize it.

In this post, we’re not going to go down the “is credit good or evil” rabbit hole. Instead, we’re talking about personal loans. Unlike a credit card that will charge variable interest rates and also come strapped with fluctuating payments (depending on your spending habits), personal loans allow you to borrow a certain amount of money and then pay it back at a fixed rate and in fixed intervals. The monthly payments are set ahead of time, and this makes determining how much you can borrow (and thus payback) easy to budget for. There are secured and unsecured personal loans. Secured personal loans require collateral from the borrower, while unsecured loans do not require any collateral before borrowing.

The best way to think about a personal loan is to imagine a potential scenario. For example, say you have $10,000 in credit card debt and are paying an average APR of 17%. If you paid the credit card company $250 per month, you would end up paying a total of roughly $14,800 over 60 months. However, say you received a personal loan for $10,000 at 5% APR. You could make that same $250 per month payment and be debt-free at a total cost of approximately $10,900 over 44 months.

When shopping for a personal loan, it is crucial to pay attention to the various fees involved. Origination fees can range from 1% to 8% (in addition to application and other fees). Your current bank is a good place to start, and then contact 3 to 4 other options. The most critical items are making sure the lender offers competitive rates (in line with the overall market), the total cost of all the fees, and the monthly repayment amount. Again, repaying an amount on a monthly basis that is going to stretch you far beyond your budget is a bad idea.

Most lenders will also require a credit score in the mid to high 600s. If you have a score in the 500 range, for example, you’ll likely need to put some collateral down to be approved. Lenders will also want proof of employment, and they’ll end up checking your debt-to-income ratio to make sure you can pay back what you’ve solicited. Once you jump through the various hoops, you’re off and running with your loan. Then comes the fun part - spending it! Oh, but after the first month comes the monthly paybacks. No free lunches in life!