Lost amidst of sea of credit cards is another financing option: the old fashioned personal loan. You go to the bank, ask for $X amount to pay for Y, and the bank gives you that money with an interest rate and terms for repayment. It’s not necessarily an easy option, as it requires a more formal application process than a credit card, and rather than get a credit line, you get the lump sum requested, with a fixed monthly payment spread out over anywhere from 1 to 5 years. Also, your interest rate is generally fixed in the 8-14% range, lower than most general credit cards but not as low as some of the introductory APR offers you may see from credit card companies.
Given these differences, a personal loan is a good idea in the following situations:
– When it allows you to consolidate credit card debt at a lower rate, with a lower payment. If you’re sitting on a ton of credit card debt at 18-30% interest, and you’re not seeing any special 0-2% introductory APR offers (which you likely aren’t given the current recession and credit crisis), a personal loan for the any amount of the balance at 8-10% can save you a lot of money.
Of course, you need to make sure those other credit cards were all paid on time each month and that your credit’s in good enough shape to quality, but it’s an option for part or all of your credit card debt. And of course, if a bank offers you an introductory 18 month 0% APR, that may be a superior option to a personal loan. But generally, a personal loan can save you money on high-interest credit card debt.
– When you need a sizable but manageable amount of money you don’t currently have to make a big purchase, or to manage bills and finances. Your dream vacation may cost $3000, and you don’t have that cash on hand. You need to replace your car, but the money you need just isn’t there, and you don’t want to deal with the car dealer’s loan sharks (who can blame you?). Putting such a purchase on your credit card may max it out and leave you with a huge bill due to interest.
But if you know you can save up the money over a few years, you can take out a personal loan to buy that car or take that vacation now, and pay it off gradually over time with manageable monthly payments. Just make sure you actually do have the space in your budget to make the monthly payments and still live comfortably. Use online loan calculators to determine how much you’d owe the bank each month before you apply.
– When your financial situation is solid, with relatively little debt and a strong income, and you want to improve your credit rating. You’ve got your bills managed, your credit cards have a manageably low balance that you pay towards on time every month, you’re able to save money every month and you want to build towards qualifying for a mortgage someday.
You can take out a personal loan to help consolidate your bills, or at least that’s what you tell the bank. Instead, you bank the amount of the loan in your savings account, use the money to make those monthly payments, and after paying a bit out of pocket in interest, you pay off the loan and walk away with an improved credit rating. Or if anything happens and you need emergency cash, you will have the cash on hand. Just make sure you apply for a manageable enough amount that you can handle the monthly payments if anything were to go wrong.
These are common key uses for a personal loan, a method of financing forgotten in our credit card and HELOC happy era. It requires a stronger sense of responsibility, but a personal loan has its uses and should not be forgotten when you’re in need of bank financing.