Loans
There’s a lot to know before applying for consumer loans, and it can be an intimidating process for people who don’t understand the basics. What kind of loans to apply for? How do banks decide who gets loans? What determines the maximum amount of loans? What determines the interest rate of loans?
The basics
Loans are either secured or unsecured, meaning they’re secured with collateral or not. The most common secured loans are auto loans and mortgages. Other common secured loans are boat or motorcycle loans, or retail loans for furniture or other big-ticket items that can be repossessed if loan payments aren’t made in a timely manner.
Unsecured loans go by several names, including personal loans or signature loans. Common uses of unsecured loans include debt consolidation, vacations, weddings or relatively small home renovations. Interest rates for unsecured loans are typically higher than that of secured loans, but lower than credit card rates.
There are three basic determinants of whether loan applications are approved: income, debt and credit history. Income and debt are considered as a ratio—debt to income ratio, or DTI.
Most mortgage lenders require that payments on mortgage loans not exceed 28% or applicants’ gross monthly income. Lenders in general require that applicants’ monthly debt payments (excluding housing) not exceed 36% of gross monthly income.
In order to qualify for a mortgage for which the lender requires a debt-to-income ratio of 28/36:
- Yearly Gross Income = $45,000 / Divided by 12 = $3,750 per month income.
- $3,750 Monthly Income x .28 = $1,050 allowed for housing expense.
- $3,750 Monthly Income x .36 = $1,350 allowed for housing expense plus recurring debt.
The other determinant is credit history. Simply put, applicants with good or excellent credit scores are better able to get loans; applicants with only fair or poor credit scores have a harder time getting loans. That’s not to say that people with tarnished credit records can’t get loans, but they may have to accept lower loan amounts, higher interest rates or secured loans rather than unsecured loans.
Today there are plenty of loan products available to meet most everyone’s needs though, and the market for bad credit loans is now serviced by specialty lenders.
Another factor of credit history is the length of the credit history. Young people whose credit history may be limited to student loans or maybe a maxed-out credit card may have to accept the same sort of terms as people who have extensive but poor payment histories.
Personal loans
Personal loans resolve life’s little crises and allow for life’s sweet indulgences
It seems like time and money are mutually exclusive: You never have both at the same time. Stay at home moms enjoy being able to take care of their families and homes, and being able to respond to emergencies. However, without a full-time salary, vacations, home repairs, new furniture and summer camps may have become out of reach. When the refrigerator dies, what may have once been an inconvenience, can become a crisis.
That’s where personal loans come in. No other loan affords borrowers the flexibility like that of personal loans. Unlike most loans, personal loans can be used for anything from urgent needs to desperately needed vacations.
In the past, many people felt comfortable pulling out a credit card to meet their financial needs. But in the new economy, many credit card issuers have raised interest rates and lowered credit limits. Today, consumers are working hard to pay off their credit card debts and are applying a new restraint on credit card spending. Personal loans, however, are less expensive than high-interest credit cards, and, with a good or excellent credit score, the interest rate can be as low as 6.99%.
The convenience of personal loans makes them an attractive option. Personal loans can be obtained online and deposited into the borrower’s bank account in as little as 24 hours. When the family car breaks down, the roof leaks or the washing machine dies, convenience and a rapid turnaround are a necessity.
The flexibility of personal loans allows for home improvements like landscaping projects, refurbished bathrooms or professional painting – the investments real estate agents encourage homeowner to make for maximum return.
When all the appliances are functional and the house is all spruced up, personal loans can be used for a much-deserved vacation. Using personal loans for travel allows time to plan the ideal trip and take advantage of the best bargains. Studies show that children who travel get better grades and have a better grasp of geography and foreign languages.
Alternatively, personal loans also provide the option of sending the kids off to summer camp while their parents enjoy a relaxing, romantic getaway of their own.
In short, personal loans save money, save grief and allow for the sort of things we all need and deserve.
Personal loans
Personal loans from family members are like land mines. Take a few simple steps to minimize risks.
The bank is usually the first place people think of when they need personal loan. However, if the bank is not an option, many would-be borrowers need personal loans from their families—a situation rife with opportunities for resentments, hurt feelings, jealousy and financial ruin.
No matter how badly needed, think twice—or thrice—before approaching family members for personal loans. Borrowers must anticipate potential problems and take all precautions to avoid them.
The first and most important consideration should be determining the most appropriate family member to approach. No matter which family members are approached, extending and accepting personal loans will probably have some uncomfortable consequences. When parents make loans to their adult children they feel entitled to know the details of borrowers’ finances, and to comment on them. Personal loans from siblings may also affect relationships with their spouses.
Before asking for personal loans, borrowers should consider the following:
- Can this candidate afford to make personal loans?
- Is this candidate likely to agree to make the loan?
- Can they afford the financial hit if the loans cannot be paid back?
- What effect will the debt have on the relationship?
- What will the effect on the relationship be if the loan cannot be paid back?
Borrowers might make suggestions that will increase the likelihood of a positive response and decrease the discomfort and risks inherent in personal loans from family members.
- Offer collateral. Doing so means lenders can place liens against the property if the borrower in case the borrower ever files bankruptcy. Lenders can then place liens against the assets and receive repayment along with other debtors.
- Give potential lenders the option of co-signing on personal loans from the bank. Doing so makes everything more official and involves a third party to neutralize the emotional aspects of the transaction.
- Whether it is done at the bank or over the kitchen table, insist that personal loans carry interest charges and very specific terms and put it all in writing. Have the agreement notarized. Ask for receipts on all payments. Following these steps increases the likelihood of repayment and avoids the potential of later confusion.
Finally, do not trust that personal loans from parents to their children will never be divulged to other family members. When other siblings later learn of the “secret” advance, they are likely to become suspicious, jealous and concerned about their stake in any future inheritance.
Do not put family members in a position that is uncomfortable at best and incendiary at worse. Instead, make any personal loans public knowledge and keep family members apprised of repayment progress. Ask that parents revise their wills or trusts to state that any remaining debt be deducted from the borrower’s inheritance and make sure other effected family members are aware of the new conditions.
American Unsecured
Personal lines of credit
When are personal lines of credit a better idea than loans or credit cards?
Personal lines of credit are perfect for those times when you’re uncertain what your total expenditure will be, for instance home renovation projects. Ask anyone who ever remodeled a kitchen if the projected expenses matched the final costs, and you’ll begin to understand one of the advantages of personal lines of credit over loans.
Personal lines of credit lines of credit allow you the convenience of writing a check or using a bankcard to draw on the account whenever you need it. Personal lines of credit are revolving credit accounts similar to credit cards; as you pay down the balance, you’re replenishing the pot of money you might need later
You make payments only on the portion of the credit limit you’ve used. If you have a $35,000 credit line for a kitchen remodel, but have only spent the first $5,000 of it to take out a wall, your payment is based on the $5,000 expenditure rather than the $35,000 loan.
In contrast, most loans are paid out in a lump sum. That means that if you take out a $35,000 loan, you have to begin paying on the full amount right away whether you’ve spent the money yet or not.
One of the biggest factors in choosing personal lines of credit over credit cards is expense. Personal lines of credit have lower interest rates than credit cards. Because of the lower interest rate, more of the payment goes toward the principal of the lines of credit, unlike credit card payments that can go on seemingly forever. Since the principal gets paid off faster, there is always a greater pot of money to draw from as the project proceeds.
Everyone loves the convenience and lower interest rates, of course, but most people opt for personal lines of credit because of the tax breaks they offer. When personal lines of credit are secured with borrowers’ home equity, the interest paid is tax deductible, just like the interest on mortgage payments. An added bonus: home equity lines of credit have even lower interest rates than unsecured personal lines of credit.
So, let’s see … borrowers take out personal lines of credit; secure the credit with home equity to get the lowest interest rates; write off the interest; use the money to increase the value and enjoyment of their homes; and pay off the debt faster.
Personal lines of credit for home renovations are a pretty sweet deal. Let American Unsecured help you sort through your personal lines of credit options and find the credit line that best suits your situation. American Unsecured is a loan-consulting firm and has helped millions of people find the money they need, and they can help you, too.
Vacation loan for holiday reunions
It seems like everyday for the last couple years I’ve been bombarded with the same negative “thou shalt not” messages about going into debt, and I’ve been obedient … until now. I’ve decided to thumb my nose at the nags and naysayers and take out a vacation loan.
You can call it rationalization, but I choose to call the results of a recent Harris Interactive Survey my justification for a vacation loan that will allow me to travel during this holiday season. I’ve decided my emotional need for connection and continuity supercedes my need for just a wee bit more financial security.
According to the Harris survey, people are willing to suffer the travails of holiday travel—in my case, even though it means taking out a vacation loan—so they can
create memories; maintain traditions; reconnect and build relationships; and,
improve their sense of well-being.
All of the above apply to me.
Two of my friends died this year. I chose not to take out a vacation loan to attend their memorials, and chose instead to apply the money to my Lowe’s credit card. I congratulated myself for being grown up and responsible, but took no comfort from it. Though I gained a couple points on my credit score, I still felt nothing but loss. The loss of my middle-aged friends brought home for me the knowledge of how tenuous life is.
In counterbalance, I reconnected with high school friends I’d lost track of 30 years ago (thank you Facebook), and I want to solidify those relationships, especially one with another woman who, like me, had her only child at 41.
The last time I went home to Ohio was two years ago when my sister had surgery for uterine cancer. I rationalized taking out a vacation loan then, not so much because I wanted to visit Ohio in January, but because my sister needed me, and I was doing it for her.
This year I’ve taken out a vacation loan for me, for my sister and for my friends. But more than all that, I’m doing it for my son. I want him to see that relationships with family and friends are important, tenuous and can be lost in an instant. I want him to see me living my values.
I also value financial security, and being a middle-aged woman with a young son means that’s especially important, but I have enough financial security that I can afford the small monthly payment this vacation loan will cost me over the next couple years. What I can’t afford is losing connection with my family and old friends.
A short-term loan may be your best bet
Are you just a little short of cash right now? Something’s come up, and you just don’t have the cash on hand to take care of it? Or maybe it’s an opportunity you won’t be able to take advantage of without a quick infusion of money that you’ll pay back quickly? You need a short-term loan.
There are some people who can spend their way through any emergency, and are perpetually in the right financial position to move quickly when doing so benefits them. But the rest of us need a little help sometimes. And sometimes the best kind of help is from a short-term loan.
A short-term loan isn’t appropriate for all purchases or situations, but for some it’s exactly right. For instance, if you’re a small business owner who needs to increase inventory before the holiday shopping season, a short-term loan that can be paid back in January will bridge the gap.
Broken equipment—at home or the office—has to be replaced immediately; coolers that conk out on February 13th can put a florist out of business, and a household without a functioning stove will quickly run up restaurant tabs that exceed the cost of appliance replacement. Again, a short-term load can make things right in a hurry.
Used wisely, credit cards are a lot like taking out a short-term loan. They allow consumers to buy airline tickets online, and pay off the card balance immediately.
A short-term loan shouldn’t be used for larger purchases like real estate, construction equipment or automobiles; in those scenarios it makes more sense to take out a lower-interest long-term loan that doesn’t have prepayment penalties.
The exception would be if the buyer has certificates of deposits or other financial assets that will mature soon, but aren’t immediately liquid. Or, a short-term loan makes sense for a homeowner who intends to replace furniture with a soon-to-arrive tax return. If the furniture goes on sale a week before the tax return is expected, it makes sense to take advantage of the savings by using a short-term loan if there are no prepayment penalties.
Is an unsecured personal loan right for you?
Personal loans come in two flavors: secured or unsecured. The difference between them is simple enough—you’ll put up collateral to secure a secured personal loan but not for an unsecured personal loan. The only question is which works best for you.
An unsecured personal loan presents a higher risk for the lender, so requires a higher credit score and income. That risk level also means that an unsecured personal loan comes with a higher interest rate than a secured loan.
So what are the benefits of an unsecured personal loan? Their broad accessibility, for starters. Millions of people—especially city dwellers—don’t own houses or cars, which are commonly used as collateral. And, if they don’t have financial assets like certificates of deposit or annuities to offer as security, an unsecured personal loan might be the only option.
And, now that home values have tanked, millions of homeowners no longer have enough equity in their houses to use them as collateral for an unsecured personal loan. And, frankly, in the new economy a credit score of 725 isn’t as shiny and promising as it used to be the eyes of many lenders.
There are other benefits to an unsecured personal loan, even for those who can offer acceptable collateral. The asset securing the loan will have to be forfeited if financial calamity strikes the borrower. A period of unemployment, a family member’s medical bills or any number of hardships could mean losing a family home or necessary transportation.
For help finding the best personal loans, contact American Unsecured, one of the nation’s largest loan-consulting firms.
The difference between a secured loan and an unsecured loan
Paper or plastic? Decaf or caffeinated? Secured or unsecured? If you’re looking for a loan, but don’t know whether you need a secured loan or an unsecured loan, this is your chance to figure it all out.
The primary difference between a secured and an unsecured loan is whether or not the borrower has to put up collateral to secure the loan. For a secured loan, a lender will insist on collateral to minimize their risk. An auto loan, for instance, is secured by the car itself; the lender simply repossesses the car if the borrower fails to make payments on the loan.
On the other hand, an unsecured loan is one without collateral. When obtaining an unsecured loan, the borrower doesn’t have to specify its intended use, and it can be used for just about anything. For instance, an unsecured loan can be used for something as prosaic as debt consolidation, as pleasant as a vacation, or as essential as an emergency medical procedure.
Accordingly, because the lender can’t repossess a week in Hawaii, a zero-balance credit card or the stitches in a toddler’s forehead, the interest rate on an unsecured loan is higher than on a secured loan, reflecting the lender’s greater risk exposure.
However, the interest on an unsecured loan is usually lower than on credit cards, and is certainly lower than the interest rate charged for credit card cash advances. As an added benefit, an unsecured loan almost always comes with a fixed interest rate and carries no annual fee.
Personal loans for credit card debts?
Credit card issuers have gotten pretty nasty lately. They’ve abruptly closed accounts, lowered limits, increased interest and shortened terms. Suddenly, what were affordable monthly payments have created a real budget squeeze, with payments that be entirely impossible to make in full or on time.
If you’re in this predicament, it’s time to consider personal loans. For many people and many reasons, they provide an attractive option to making—or worse, not making—those monthly credit card payments:
- Personal loans have lower interest rates than many credit cards.
- Personal loans can be paid off with lower monthly payments.
- Personal loans can actually improve credit scores damaged by credit card debts too near their limits.
- Even when personal loans aren’t enough to pay off all credit card debt, they reduce the ratio of available credit to credit balance.
- When personal loans are applied to pay off a significant percentage of a credit card balance, the credit card issuer may agree to a lower interest rate.
- Personal loans can be obtained quickly and easily online.
- Personal loans are typically unsecured loans, meaning they don’t put personal assets such as homes at risk.
- Personal loans are by far a better option than payday loans, which often carry annual interest rates between 300 and 700 percent.
Financial pressures affect quality of life in so many ways; marriages, families, professional opportunities, and physical and mental health all suffer as financial difficulties mount.
Though personal loans might not be a panacea for all of life’s challenges, they are a viable option for millions of people, and might improve your situation, too. Explore your options with American Unsecured.
The Skinny on Unsecured Personal Loan and Signature Loans
You need money. If you’ve been looking for an unsecured personal loan, and you have good credit, a job and a reasonable work history, you may have some very attractive options you didn’t know about.
First of all, let’s talk about what a unsecured personal loan is. They are loans based on your ability to repay and history of doing so. Beyond that, they require only your signature and are sometimes called signature loans or personal unsecured loans. They don’t require any collateral to secure the loan in the event that you’re unable to pay it back. Read more