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Before You Borrow: A Second Look at Personal Loans

Posted February 4th, 2010
by Staff

secondlookSome types of credit are good, and some are bad. Home loans, for example, are good. They give you a lot of money at a really low interest rate. Paying consistently on a home loan is a huge boon to your credit report and credit score, too.

Car loans are good, too. Unless you’re buying a car from “buy here, pay here” lot, you’re getting a decent interest rate. No, it’s not as low as a home loan rate, but it can still be decent.

Store credit cards? Those suck. They have high interest rates and sometimes even come with fees. You’re likely to pay as much as 15 percent more on store credit cards than you are on a car loan and 25 percent more than a home loan.

Personal loans are a credit middle ground

Somewhere in between these extremes is the personal loan. A personal loan is an unsecured loan, which means that you don’t provide collateral. As such, the bank sees that kind of loan as more of a risk than other loans, so it charges more interest. The interest rate on a personal loan will be higher than a mortgage or car loan, but will probably be less than a credit card of any sort.

Paying cash is better

If you have money in a savings account, you’re almost always better off using that money for whatever it is you need rather than taking out a personal loan. Your savings account is going to earn interest, but it’s a relatively low number. This is especially true when you compare it with the interest rate on a personal loan. Yes, your savings will be short. But not having the debt of a personal loan hanging over your head should outweigh the concern about letting your savings get low. Personal comfort is no substitute for sound financial decisions.

Watch out for debt consolidation

It can be tempting to consolidate higher-interest debt with a personal loan. And, in some cases, it’s a good idea. The theory is sound enough: pay off credit cards and pay half the interest.

The problem comes after you’ve paid off those credit cards. It’s easy to fall back into the habit of using them again, and racking up more debt. Eventually, you can find yourself paying on maxed-out credit cards as well as your personal loan. You’re worse off in this situation than when you started.

Photo via lepiaf.geo

Categories: Personal Loan Woes



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