Life provides small emergencies that can strike at any time and when they find you without a ready supply of cash, these small emergencies can loom large. Say your transmission went out on your car or the dishwasher has suddenly gone silent while your credit cards are maxed out. What do you do? You may be in the market for a personal loan.
Personal loans, once a tiny part of lending institutions' portfolios, are growing in significance and now make up more than twenty percent of non-mortgage loans. Loans in the order of one to two thousand dollars were not very popular with financial institutions who tend to favor credit cards. Pay off a personal loan after your emergency subsides and you may be lost forever to the issuing bank. Credit card customers tend to stick around longer.
Credit cards as short term loans are risky business for consumers as we tend to make the minimum payment, locking ourselves in for n extended period of time and extended interest payments. On the other hand, personal unsecured loans have fixed pay-off periods and (usually) lower interest rates.
Going shopping for a loan
Your first step is to decide how much you really need and you will want to pare this down to the absolute minimum as this type of personal loan should be treated as an emergency situation only. Then start your search for a loan with a suitably low interest rate or upfront fees. There are several online services that allow you to compare rates for personal loans and may even offer instant approval. Your local credit union should be high on your list of options to consider while payday loans should be approached with caution because of their high interest rates. Some banks may offer repayment periods of up to two years but you should consider the total interest you will be paying should you stretch your payments out that long.
I tend to favor credit unions as almost all of them offer short term personal unsecured loans without the security requirement and many will offer loans as small as $ 500. The non-profit nature of credit unions will likely allow them to offer friendlier terms as well. If it's close to tax time, some lenders will look favorably at your likely tax refund based on two years' history. And, of course, make sure you have two recent pay stubs handy.
If your credit report is in such bad shape that a credit union won't touch your application, you may be left with no choice but to approach a payday lender. If that's the case, read the terms and conditions very carefully to make sure you understand every charge on your loan documentation.
What does this cost?
Your personal unsecured loan shopping should entail more than comparing interest rates to determine if you are getting a good deal. Lending institutions typically charge fees for loan origination, document prep and the loan insurance. Make sure you understand the nature of these fees and are in agreement with them. One trap you will want to avoid is the offer of a higher loan amount than you need as this is a sure sign of a loan officer trolling for a higher commission.
Be prepared to walk away if you don't like the terms you are being offered. And make sure your questions are being answered up front prior to allowing several lenders to pull your credit report as this can have an immediate negative effect on your credit report score, and consequently, the rate you end up paying.
In the good old days you could ask for, and be fairly sure to get, a salary advance. Many small companies still continue this practice. Ask your payroll or HR department about salary advances as they may be still a part of many companies' employment policies. If you have seniority at your company you are likely to be eligible for a salary advance.
Most people would say these are to be avoided like the plague as they could put a strain on family relations for years to come. You may want to approach rich aunt Alice as a last resort and if you do, treat it like a visit to a lending institution. You may allay aunt Alice's fears about risking her savings on your personal unsecured loan by drawing up a simple promissory note that lays out the amount you are borrowing, the interest you will pay and the time period of the loan.
Even if you don't have an emergency, now may be the time to look at your options, particularly if you have limited savings to drawn down in the event of a disaster. You never know what will come up and you can't be too prepared.