The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
Can a Personal Loan Help You?
If you've run into an unexpected expense, or need money now for a personal project, there are several personal loan options out there that can help. Some are better than others and some should be avoided at all costs. Watch the video below for a brief summary and then read the rest of the article to get the full details!
Meet the good, the bad and the ugly of personal loan options available to you when you need financial help:
Your lender will approve you for a set amount to borrow for a personal line of credit or a personal loan. This amount can range from $1,000 to $100,000. These are both unsecured, which means there is no collateral (say a car or a house) for the loan. Interest rates are often higher than auto and mortgage rates; however, they're also less risky for you because there is nothing for the lender to take from you should you fail to pay them back (or default).
- A personal line of credit (PLOC) allows you to draw as much or as little money as you want from the approved amount at any time. Similar to some credit cards, you only pay interest on the amount you have used. You don't need to pay it back all in one lump-sum. Rates tend to vary between different lenders and most are variable, meaning they will change based on the market. Some lenders will even charge an application fee and annual fees.
At Desert Financial, our PLOC is called a Variable Rate Line of Credit, which requires no application fee and no annual fees.
- A personal loan allows you to borrow a specific amount of money over a set amount of time at a fixed rate. Once approved, you’ll receive the money all at once. Personal loans are a great option if you know exactly how much you'll need.
At Desert Financial, our personal loans are called Signature Loans.
Depending on the current market interest rate, a PLOC may have a better rate than a personal loan (or vice versa). Check with your lender to determine which is the lowest.
While you may consider a credit card as an alternative to a PLOC or personal loan, it may not be the best route to take. First, your interest rate may be higher than a personal loan or PLOC. Second, if you’re nearly maxed out on your credit cards, you may have to increase your credit limit to ensure you have more wiggle room for purchasing items. This can actually make it more difficult to get out of debt if you continue to max out the card.
Consider increasing your credit limit, but only if you can keep your debt-to-credit ratio low. An even better option would be to transfer all your debt to a lender who can get you a lower interest rate, plus an even lower introductory rate.
In 2010, Arizona made payday loans illegal (although you may still see some places offering them). These high-interest loans had an annual interest rate that averaged out to 400%! In their absence, an even uglier option appeared in 2015: flex loans.
Flex loans — also referred to as a consumer access line of credit — may seem like a good idea, but they’re actually worse than you think. To get one, you simply need to fill out an application. If you’re approved, you’ll have access to up to a few thousand dollars of credit. Like a credit card, you can choose to use a portion or all of the credit limit. Plus, you’ll be charged interest each month on what you borrow and receive a monthly statement.
Not too bad, right?
Flex loans also come with fees. You may incur a fee every time you use your flex loan, every month or even every day. If you do the math to convert those fees and the monthly interest rate to an annual amount, you’ll easily see triple digits!
In addition, flex loans allow you to pay a minimum amount each month; however, this can cost you more in the long run. The more time you take to pay off your balance, the more interest will accrue. This means you’ll take on more debt than you can manage and you’ll be kept in a cycle of debt.
Do Personal Loans Affect My Credit?
Yes. Anytime you borrow money, your credit score is impacted. Paying it back in a timely fashion will affect it positively, while delays or defaults can yield negative results.
What Can I Use A Personal Loan For?
It’s not uncommon to use it for personal projects and unexpected expenses. If you’re seeking a PLOC or personal loan, it’s important to remember the following:
- Set a limit for yourself. Don't spend all the money you are approved for. Instead, keep yourself accountable.
- Focus on your needs and limit your wants. Create a list of all the essential items you need to get by. Anything extra, including snacks or treats, should be cut out. Ask yourself, "Do I really need this right now or do I just want it? If I need it, can I substitute it with something else that is cheaper?"
- Be aware of repayments. Even if you got a great rate from a lender, the money you borrow today will still need to be paid back with interest. Sit down and do the math on how much this will cost you. If math isn’t your strong point, ask your lender for help.
- Contact your lender to determine the best option that would work for you. High-quality lenders will be happy to walk you through the options and help you make the correct decision. Avoid the ones who seem to be pushing one option, without explaining why.
How Do I Know if I Have a Good One?
Even if you find an offer online or from a retailer, it may not be all that great. Consider the following, before you proceed:
- Terms: Look for a loan that gives you five to 10 years before your payment is due in full. Be wary of anything under a year.
- Interest rate: If it’s a flat fee, chances are that’s a super-high annual interest rate. Quality lenders usually offer between 9% and 20% annually.
- Teaser rates: Don't look at just the intro rate. Verify the rate after the introductory period is over.
- Other benefits: Does the lender offer discounts or additional benefits if you use them? Sometimes fees are waived if you're already a member at the institution or have a good relationship with them.
- Trust: The lender should be well known, established in the community and ideally experienced several highs and lows from the past financial market.
- Your best interest in mind: The lender should also care about you achieving your goals and helping you out.
Sometimes the unexpected happens in life and you may not have money to cover it, or you need assistance to help with an expense. Desert Financial has several options to help. If you’d like to learn more about our personal loan or PLOC, call (602) 433-5626. We are here to support you, your needs and your goals!