How to Decide Between Unsecured Personal Loans, Credit Cards, and Payday Loans

[Jun 23, 2009.]

 

There is an old saying that goes, "When all you have is a hammer, every problem looks like a nail."

This humorous axiom could be applied to the reliance of the American consumer on credit cards. Of late, however, this long time marriage between shoppers and their beloved plastic has soured.

Consumers have tired of paying high interest rates and penalties, and not being able to read stuff that credit card companies send them in the mail. Thus, the new credit card legislation requires credit card issuers to clarify their interest rates and penalties up front.

Meanwhile, credit card companies have tired of...well, not being paid back. Default rates on credit card loans have been soaring, badly hurting the balance sheets of banks small and large.

In this environment, more and more people are looking at other forms of short-term unsecured loans, such as unsecured personal loans and payday loans. But in order to make good decisons, it's vital to understand the difference between personal finance tools.

Unsecured Personal Loans: Fixed Rate With a Set Repayment Schedule

Personal loan interest rates vary depending on the borrower and the amount, but are generally lower than payday loans and credit cards. For borrowers with good credit and a steady job, personal loan repayment rates and terms can be excellent--say, 9 percent paid over the course of 12 months.

Unsecured personal loans are especially appealing for borrowers who:

-- Can repay the loan exactly according the loan contract

-- Can budget in the coming months to make sure the loan fits into the monthly bills allotment

-- Have a steady job

-- Need the loan for a "once in a blue moon" occasion, not as a recurring event

Payday Loans Are a Different Deal

Payday loans help many people, but must be used wisely and understood for what they are. Payday loans typically carry much higher interest rates than an unsecured personal loan, but they are also more flexible. Borrowers can "roll over" payday loans to the next payday, for example, by paying a lender fee.

Payday loans are a good tool for borrowers who:

-- Need money now

-- Have bad credit

-- Have a steady job

-- Don't plan on using payday loans every payday (the fees add up quick)

-- Don't mind paying more for the convenience and immediacy of a payday loan

Credit Cards Out of Style for the Moment, Maybe, But Still Very Useful


Though credit card issuers have been taking some lumps lately, credit cards will never completely go away. The convenience and flexibility of credit cards, when properly used, is unbeatable.

But, as with other personal finance tools, it's up to lenders and borrowers to create a relationship that works for both parties--and then honor that relationship in good faith.

 

About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.