Lucky for you, there’s family. Yes, asking to borrow money from your family is never easy. It’s embarrassing. In addition to whatever other baggage you might have going on, it can be downright humiliating. It’s like admitting that you’re not able or responsible enough to take care of your own financial issues.

Here are some tips to help the process go more smoothly:

• Pick the right person to ask. Don’t ask someone for a personal loan who doesn’t have any extra money, or who’s going through a financial hardship just because you know they’re likely to say “yes.” That’s just taking advantage, and you don’t want to be that kind of person. Pick someone who can afford it.
• Ask for what you need. Don’t ask for less than what you need because you’ll just be back asking again next month. Figure out, realistically, how much you need and ask for that. If you think it’s too much for one person to loan you, ask several different family members until you get the amount you need.
• Have a repayment plan. Don’t just vaguely agree to “pay it back as soon as you can.” Set out a plan with specific dates and specific amounts. That helps you as well as the person lending you the money know what to expect.
• Repay promptly. No, your uncle Jed isn’t likely to report you to the credit agencies for not paying back the $300 you used to get a new muffler on your Pinto. But, not paying back promptly and in the agreed-upon timeframe can damage your relationship. Credit reports clear up. Relationships take a heck of a lot more to rebuild. Don’t wait for the deadline if you can’t make a payment. Talk to them as soon as you realize you’re not going to be able to make it.
• Put it in writing. You can get a loan agreement relatively cheaply at an office supply store. Work up a legitimate agreement. This will help your family member be more confident in your desire to repay the loan, and will also give them recourse if you don’t.

Photo via Orin Zebest

Still, there are some things that can hurt your chances of getting approved for a personal loan that you might not have considered. Here are some things that can be holding you back without knowing it:

• Lie on your loan application. The fact of the matter is that the bank or other lender is going to verify the information on your application. If you don’t own your home, don’t claim to own it. If you make $35,000 a year, don’t claim to make $37,500. You’re going to get caught, and when you do the loan application is going to be denied. Even if you’re not sure you’d get caught, you don’t really want to risk it.
• Get a cosigner. Many people are under the mistaken impression that having a cosigner always helps the loan application process. This is not necessarily the case. Even a married couple may find that they can get approved more readily if only one of the spouses applies for the personal loan.
• Take out the loan to buy a house or car. The fact of the matter is that you can get a much better rate on your house or car loan than you would  a standard personal loan. Most financial institutions will ask you want you want to use the personal loan for, and if it’s for a home or car they won’t approve the loan but instead will point you to a more appropriate offering.
• Wear a funny hat to the bank. You might be surprised to know how much leeway a loan officer at a bank really has when it comes to determining whether or not you get a loan. Dress your best, and make sure to be polite and on your best behavior when you go to the bank.
• Ignore credit report advice. Your chances of approval really do rise and fall on your credit report and your credit score. Do what you need to do in order to make sure they’re the best they can be.

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Putting The Credit Score Puzzle Together

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Here are some things to think about when you’re considering whether or not to take the personal loan plunge:

• Understand the terms of the loan. Otherwise, you could wind up paying more in interest in the long run. For example, you might have a variable rate loan. That means that the rate on your personal loan could go up at intervals specified in your loan contract. If the debt you’re paying off is at a fixed rate that won’t change, your personal loan rate could conceivable catch up to and even pass your other debt. The same holds true if the personal loan has a low introductory rate that will automatically go up significantly after a period of time.
• Be sure you can afford the personal loan. In theory, by paying off other debt you’ll reduce your overall monthly obligations. Still, if you don’t have the budget to make the personal loan payment, you aren’t going to be any further ahead. If you can’t make the payments, you might consider turning to other solutions, such as consumer credit counseling, before you turn to a personal loan to solve the problem.
• Don’t build your other debt back off. What happens, in some cases, is that a person will take out a personal loan to pay off their credit cards. Then, because their credit cards are paid off, they wind up going back out and racking up a bunch of additional credit card debt. Then, you’re further behind than when you started. Some lenders will even require that, if you’re taking out a personal loan for the purposes of consolidating debt, that you close the accounts that are being paid off as one of the conditions for approval of the personal loan. If you’re likely to go out and build your debt again, you’re better off not taking the loan in the first place.

Photo via quaziefoto

However, there are also some bad reasons to take out a personal loan. Here are the top 10:

1. Buying a pony. Because, hey – who doesn’t want a pony? Still, a pony takes a lot more money than just buying it. Unless you can buy oats on a regular basis, this is a bad reason to take a personal loan.
2. Buying a car. Unless you’re talking about a 10 year-old clunker, you should try to get a traditional car loan first. Your interest rate will be lower. I promise.
3. Going on a fishing trip. Most fishing trips shouldn’t cost thousands of dollars. If yours will, chances are you’re doin’ it wrong.
4. Paying bills. If you need to take out a personal loan to pay bills, you’ve got bigger problems. It’s a sign your budget may not be as well thought out as you might like. Try to find other ways to pay your bills, rather than with a personal loan.
5. Building a moat. If you must have a moat, get a home equity loan rather than a personal loan.
6. Paying a student loan. Personal loans are great to pay for college expenses, but not after the fact. Your student loan rates are going to be much lower than any personal loan.
7. Pocket money. Here again, if your budget can’t support your video game habit, you need to buck up and deal. That, or find a better job.
8. Starting a business. There are tons of better sources for startup money than a personal loan. I’m not saying you should never do this one, just that it should be a measure of last resort.
9. Buying an engagement ring. That’s just the first step in the “three rings of marriage.” The engagement ring, the wedding ring, and the suffer-ring.

10. To pay off a personal loan. That’s like robbing Peter to pay… well, to pay Peter, I suppose. After you pay the loan fees, even if you get a better rate, chances are it’s going to be a wash at best.

Photo via dreamcicle19772006

Still, not everyone claiming to offer you a loan is legitimate. Here are 10 signs that the personal loan offer you’ve received might not be on the up and up:

1. The personal loan offer has a return postmark of New York, yet claims to be from Nigeria. In addition to the famous “Nigerian Prince” that needs you to send him $30,000 so that he can deposit $20 billion into your bank account, there are also similar fake personal loan offers. Don’t fall for this one.
2. The personal loan offer comes from your garbage man. There are rumors that those guys are all part of the mafia, anyways. Borrow their money, and you’re likely to wind up with a broken leg if you don’t pay it back. Stick to reputable financial institutions.
3. The lender asks for a security deposit or a processing fee up front. The fact of the matter is that personal loan lenders include all of their interest and fees in the loan. There are some exceptions – such as the closing costs on a mortgage – but these are very few and far between. Don’t just randomly give people what little money you have before you do some investigation.
4. The lender claims that he will give you a loan without any fees if you borrow twice as much and let him invest the part you don’t need. This is a newer hoax. In this one, the scam artist loans you a certain amount of money. They then create a loan for twice that amount – plus interest – and then tell you that the investments failed and you’re on the hook for the balance. Think Bernie Madoff kind of stuff here. This is, of course, illegal.
5. You sign the papers and hand over your bank account number, but no money appears. That’s the biggest sign that you’re in trouble. You don’t actually get the loan money, and you’ve handed someone the ability to take money from your bank account all at once.

Photo via Patrick Hoesly

From there, though, the waters get a little bit muddier. It’s not always clear who has the best deal on a personal loan. That’s why, if you’re going to get the best rate and the best overall terms, you need to do a bit of shopping around. Inevitably, you’re going to need to make a decision about whether you want to get that personal loan from a bank or from a credit union.

What are credit unions?

It’s important, first of all, to understand the difference between a bank and a credit union. A credit union is owned by the members. When you join, you’re a part owner in the credit union. You have a voice in how the institution is run. You get to elect the board of directors that actually govern the credit union. Your choices have a direct impact on how the credit union is run. This all stands in contrast to a bank, where only shareholders have any say in the company.

A credit union is also a non-profit organization. This means that the earnings the bank has comes back to their members by way of high-yield savings products and low rates on loans.

Rate really does matter

And so, it really does all come back down to rates. If you can get a better rate at a bank, you should highly consider getting your personal loan through the bank. If you can get a better rate through the credit union, then you should go that route.

On average, you’re going to get a better rate with the credit union. Keep in mind, however, that banks will regularly run specials that can compete directly with the credit union rates, so it’s not a hard and fast rule.

Overall banking services

In fact, some experts suggest that you ditch your bank for a credit union altogether, not just for loan services. There are compelling reasons to do so, too. By being a member in a non-profit institution, you’re more likely to see rates and terms that are in your best interest, rather than the best interests of shareholders.

Photo via Michel Filion

Fortunately, you may have an option. You can get what’s known as a “secured” personal loan by putting up something that you own as collateral.

There are several ways to do this. For example, you might have a vehicle that you own which is paid off. You can use that vehicle as collateral on your personal loan. Depending on your credit rating, you may be able to get a loan for the full market value of the vehicle or even more.

The same is true for your home. You may be able to get a loan based on the equity in your home. These kinds of personal loans are sometimes called “home equity loans,” and are another great option if you qualify for them.

These loans differ from, let’s say, a traditional car loan or a traditional mortgage. You’re not using the borrowed money to purchase a car or a house. You’re using the borrowed money for another purpose, whether it’s to pay off higher-interest debt, help pay for a child’s college education or wedding, or even just to take a Caribbean cruise.

Advantages to Using Collateral

There are a number of significant advantages to taking out this kind of a personal loan as opposed to one that doesn’t use collateral.

One of the biggest advantages, of course, is the interest rate. You’re going to get a much better interest rate when you have collateral than when you don’t. This is especially important when you’re using the personal loan to pay off higher-interest debt, as you want to replace that high rate with a rate as low as you can get.

Another advantage is in qualifying for the loan. It’s easier to qualify for a loan when you put something of value behind the loan beyond just your word.

Disadvantage to Using Collateral

There is a potential downside to taking a personal loan using collateral. If you can’t pay the loan, the bank has the right to take your property. Obviously, you want to make sure you have the means to make your loan payments to avoid this kind of scenario from developing.

Photo via Bruce Tuten

How much do you need?

The first thing you need to do, though, is figure out how much you are going to need to get your business off the ground. You need to add up all of your starting costs and figure out what working capital you’ll need. That involves making a cash flow projection for the next 12 months, and then figuring out how much working capital you’ll need beyond what comes in.

Primary sources for funding

Most small businesses start with an individual’s own savings. Personal savings is the safest way to start a business, because it doesn’t require you to owe anything to anyone. In an ideal world, your personal savings will be all you need to get up and get going.

Realistically, however, you’re probably going to need more than just your own savings. You can consider turning to friends and family who believe in you and believe in your business idea. If you go this route, consider drawing up a formal agreement with them that indicates how and when the funds will be repaid.

From there you can start looking at things like personal loans. You may be able to get a personal loan from your local bank or credit union, and you may be able to do so at a decent rate. Of course, this relies on the idea that you’ve got a decent credit rating to start with.

You can also consider a second mortgage, also called a home equity loan. The downside to this is that, if your business should fail, your home could be in danger. Still, it’s a relatively low-interest way to fund a new business.

You can also look into a small business loan from the small business association. The SBA loans money to entrepreneurs, and will often make loans when a bank or credit union wouldn’t.

The key with borrowing money is knowing for sure you’ll be able to pay it back, and having a solid enough business plan to convince someone to loan you the money.

Photo via jasonlam

Remember that the 12% to 18% range is for well qualified borrowers. This means that your credit score has to be above 680. If your credit score is below that number and if you’ve missed several bill payments or been late on your payments, you’re not considered a well qualified borrower. You’ll have to settle for a rate closer to the 20% mark or may not be able to get any kind of a personal loan at all.

Fixed Rate Personal Loan

Whatever the rate, if you want a personal a loan with a fixed interest rate consider the following:

• You will only have one interest rate for the life of the loan
• You will one payment for the life a loan
• You will have to take all the money you need at once

Credit Cards

If you decide to take a personal loan on a credit card with a credit limit consider the following:

• You can borrow the money as you need it
• Credit cards offer more convenience and flexibility
• Convenience can be a negative feature, too
• The interest rates will usually be higher
• The interest rates are usually variable
• You can stay in debt longer because you’re only required to make the minimum payment

In general, the more fiscally responsible approach is to get a fixed rate loan. That way you always know you’re making progress each month toward paying down your principal.

Photo via Matti Mattila