It is surprising that personal loans are so popular. With an average of $8,402 per borrower, more than 20 million people have personal loans.
It is easy to see why. The personal loan can be used for any purpose, from home repairs to launching a new business or paying for wedding and funeral expenses. They can be used to pay off credit card debt in difficult times.
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The pandemic and subsequent economic downturn caused banks to tighten lending standards for loan applicants, while focusing on relief measures that would benefit existing customers.
Financial experts advise that you should weigh all options when looking into a personal loan. Although lower interest rates may make personal loans more appealing, you will need to have a solid credit history before being able to lock in the advertised rates.
Anuj Nayar is the financial health officer at LendingClub. He said that LendingClub has stopped customer acquisition marketing and concentrated efforts on existing customers. They offer payment deferments to customers who are in financial hardship. New applicants are subject to stricter underwriting requirements. LendingClub now requires more verification. LendingClub also reduces the types of loans available to those with average credit.
We reached out to other major banks and online lenders who were unable to comment on the volume of loan applications since the COVID-19 pandemic began. However, some are offering relief to existing customers. According to a spokesperson, U.S. Bank is offering a temporary rate cut (fixed 2.99% APR for existing unsecured personal loans below $5,000) with terms up to 48-months.
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The decision to take out a loan will depend on your financial situation, life goals, risk tolerance, and other debt levels. You should be careful before you sign on the dotted sheet to avoid getting trapped in monthly payments that you cannot afford.
We reached out to Nayar Torabi and Farnoosh Turabi, financial journalists and hosts of “So Money”, for their top tips on personal loans.
How personal loans work?
Personal loans are well-known for their flexibility and versatility. You can use them to consolidate credit card debt, start a small business, fund vacations and refinance student loans.
It works like this You borrow money at an agreed-upon interest rate and pay it back each month. Personal loans are usually unsecured. This means that they don’t require collateral such as your home or car to be approved.
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Personal loans can be more appealing than credit cards because they have lower interest rates and are subject to fixed payments. Torabi says that personal loans are more attractive than credit cards if you have multiple credit cards with over 20% interest. If you can get a personal mortgage at 10%, I often see people borrowing that loan to lower their interest rates.
The pros and cons of personal loans
- Potentially low interest rates: A personal loan rate may be half to a third lower than a credit card’s.
- Flexible uses: Although many of these are not recommended, loans can be used to pay for a variety of expenses including weddings and vacations, divorces, funerals, student loans or home improvements projects, medical bills, business starts, and credit card debt.
- Fixed terms: Personal loans are generally easy to understand and have simple terms. Fixed terms: Your monthly payments, interest rate, term length and payment amounts are set and will not be affected by the market.
- Unsecured: Personal loans are not required to provide collateral such as your house or car in order to be approved.
- The big lending market: A loan can be secured without you having to visit a brick-and-mortar bank. There are many options: Online banks, credit unions and community banks all offer better rates.
The Cons of Personal Loans
- Hidden fees: It’s important to ask about origination fees. These are one-time fees that range from 1% to 88% of the loan amount and prepayment penalties. These fees are incurred to repay a loan early. A loan that appears good on paper could end up costing you much more long-term.
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- Good credit: is required. If you don’t have a good credit history or have bad credit, it might be difficult to get a personal loan. You will get a better APR the more credit you have.