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Are some personal loans better than others?

[Oct 22, 2010.]


Borrowing money to pay your monthly expenses is a bad move. But there are times when getting a personal loan could help through a financial emergency. So what types of loans are available, and are some better than others? Use the following tips to understand the different loan products that might be available to you.

  • Personal loans. More than likely you're probably considering applying for an unsecured personal loan. Your signature is the guarantee that you'll pay back the money and no collateral is required. Some personal loans may have fixed rates but many have adjustable rates. Interest rates on personal loans tend to be lower than credit card rates, but higher than mortgage rates.
  • Home equity loan or home equity line of credit (HELOC). If you have equity in your home. you may be able to borrow against your home's value. The money is borrowed as a home equity loan and either paid out as a lump sum, or as a line of credit. The line of credit can be used at your convenience, and the lender usually gives you checks or a debit card to access the funds.
  • Payday loans. This is a very expensive form of borrowing. Payday loans don't require a credit check but you must provide a post-dated check that gets cashed on payday when the loan is due a couple weeks later. Some payday lenders require that you provide a checking account number. The annual percentage rate (APR) on cash advance loans can run 400 percent or more. Payday loans can get you trapped in a cycle of borrowing without being able to pay off debt. Keep in mind that payday loans are illegal in some states, even if you borrow from an online lender.
  • Title and pawn shop loans. As with payday loans, title lenders and pawn shops charge very high interest rates. Title loans require you to hand over the title to your car for the money you borrow. If you can't pay the loan back, you lose your vehicle. Pawn shops allow you to bring in possessions in exchange for a loan. You have a specific period of time to pay off the loan and reclaim your goods, or the pawn shop can put it up for sale. Borrowing money this way is a bad deal and you don't receive anywhere near the value of your goods.
  • Peer-to-peer loans. Social networking sites like Lending Club or Prosper allow you to borrow and lend money from your peers, i.e, total strangers. You don't have to know your lender so you don't actually interact. Some P2P sites require a credit check and if your credit score is too low you won't be able to apply for a loan.

The best choice is to forget about borrowing money and look for ways to cut expenses and make your income stretch further. But if you do need to get a loan, research your options carefully so you don't make your financial situation worse.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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