When you need to borrow money you have a number of choices to make: bank or credit union? Credit card or home equity loan? Fixed or variable rate? One option you may be considering is a personal loan. If so, what makes these loans different?
They carry fixed interest rates. That makes them different than, say, a home equity line of credit which usually carries a variable interest rate that can change when interest rates in the economy change. Variable-rate loans my look more attractive at first since their “initial” rates are often low. But the rate (and payment) may rise later, and may make the loan more expensive (and risky) over time.
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You must pay them back in a certain amount of time. Most personal loans carry a fixed repayment period of one to five years. During that time you make fixed monthly payments. That makes them different than credit cards, which allow you to make a minimum payment that will barely make a dent in your balance. If you prefer the certainty of knowing when your debt will be paid off, a personal loan may be your preferred choice.
They give entrepreneurs a chance to prove themselves. It’s become more difficult over the past few years to borrow to start or jumpstart a young or small business. Brand-new businesses, for example, aren’t likely to find a bank that wants to give them a loan just because they have a great idea for a business. Banks often want to see sales and revenue figures, which newer businesses aren’t likely to have. That’s why some small businesses are turning to personal loans, which they obtain on the strength of their personal credit and finances, rather than that of the business. And the interest paid on a personal loan used strictly for business purposes is often tax deductible; talk with your tax adviser. If you want to see a snapshot of your credit situation and see if you’d likely qualify for a personal loan, use the Credit Report Card.
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They’re the new home improvement loan. A few years ago, if you wanted to build a deck or remodel your kitchen, your bank or credit union was probably more than happy to give you a home equity loan to fund your project. But now, between stricter mortgage loan requirements and home values down in many parts of the country, getting a home equity loan may feel like more trouble than it’s worth. That’s why many borrowers are turning to these loans to fund home improvement projects. And unlike home equity loans, which often require interest-only payments for ten years before the borrower has to start repaying the principal, with a personal loan you’ll know your project is paid for in a few years — before you’re ready to start a new one!
Have you used a personal loan to consolidate debt, renovate your home or grow your business? Tell us about your experience in the comments below!
Image: ptmoney.com, via Flickr
Gerri Detweiler Gerri Detweiler is Credit.com's Director of Consumer Education. She focuses on helping people understand their credit and debt, and writes about those issues, as well as financial legislation, budgeting, debt recovery and savings strategies. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.com.
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i recieved a small personal loan for the first time. which i needed A.S.A.P . I was homeless and no one would rent a place to me because of my son. a convicted felone.I used title of my truck for loan, Out of 80 rental applications. one landlord would accept my credit/history and not have to have my son on applications,.My son is 20 yrs old has felony conviction.and he is judged and rejected.no education,no credit history.i needed 2 months rent and deposit,@700,00 rent.total 2100.00 For 2 months living in truck/topper camper,not able to get rental apartment,due to no one will accept felony convictions of applications of renters.time is done for the crime,so now the rest of his life this world of human beings will judge and reject them.just like as the old bibical days did to the lepers,cannot have them around or be near those kind. thank God for personal loans and thank you the Bank.