Personal loans can help in a crunch. But read this before you apply

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While the stimulus checks have started dropping into bank accounts and many creditors are offering relief on payments, those options may not be available to everyone or they may not be enough. That’s why some people are turning to unsecured personal loans, often used for debt consolidation or home improvement […]

While the stimulus checks have started dropping into bank accounts and many creditors are offering relief on payments, those options may not be available to everyone or they may not be enough. That’s why some people are turning to unsecured personal loans, often used for debt consolidation or home improvement projects, to cover emergency expenses.

While some lenders are offering low interest relief loans, others are tightening credit requirements for borrowers.

Here’s what you need to know about taking out a personal loan during this crisis and whether or not one makes sense for you.

An unsecured personal loan is money borrowed from a bank, credit union or online lender that can be used for anything. The money is paid back in installments over time, usually with a fixed interest rate.

While many experts would caution against personal loans, which often come with high interest rates and fees, they could make sense in an emergency situation.

“Ideally, I’d hope people would use relief programs before taking on additional debt,” said Justin Pritchard, a certified financial planner at Approach Financial, in Montrose, Colorado. “But if you absolutely need to borrow, a personal loan is not the worst way to go.”

Since the loan is unsecured, you don’t need to pledge collateral, which helps you avoid putting your home or other valuable assets at risk, Pritchard said. “Plus, you’re not raiding your retirement savings and pulling money out of accounts like a 401(k).”

The fixed interest rate on most personal loans also allows you to know exactly how much you are paying each month and when you should pay off the debt, he said, so that is helpful when compared to credit cards, which often have variable rates.

But interest rates on personal loans can be very high as well, he warned.

“Some personal loan rates go above 30%, so you’re not necessarily getting a great deal,” he said. “Plus, there may be origination fees that add to your total borrowing cost, and you don’t get a break on those if you pay off the loan early.”

What it takes to get a loan

While various lenders will offer loans to those with credit scores ranging from bad to excellent, it is hard to find a lender that will issue a loan without a demonstrated ability to pay it back.

“Lenders look for the borrower’s ability to repay that loan,” said Elisabeth Kozack, managing director for lending at Marcus by Goldman Sachs. “Lenders want to verify the source of income you have. It could be employer income or it could be military income, retirement income, benefit income.”

Your credit score and your past payment history will also factor into your loan offer.

When shopping for loans, she recommends determining the amount you need and what kind of monthly payments you want to make. And consider the interest rate together with overall benefits like lower fees or flexibility with payment dates.

“The interest rate generally will be higher for longer-term loans and lower for shorter-term loans,” she said.

Explore your options

Think about a loan holistically, inclusive of fees and interest. An origination fee isn’t necessarily a bad thing if you can get a lower rate and spend less on interest plus fees over the life of the loan.

“If you pay an origination fee, be sure to account for that in the amount you request,” said Pritchard. “Lenders might reduce your loan proceeds to cover origination fees.”

He recommends getting quotes from at least three different lenders. A diverse sample would include a local bank, a credit union and an online lender.

“Credit unions, with their community focus, might be most willing to work with you if your finances are less-than-ideal,” he said.

If you have explored your options and are deciding between a personal loan or credit cards, check with your bank or credit union to see if they offer an economic relief loan, said Luis F. Rosa, certified financial planner at Build a Better Financial Future in Las Vegas.

These loans have more favorable terms and are being offered specifically in reaction to the coronavirus crisis. Navy Federal Credit Union, for example, is offering a relief loan to members for between $250 and $5,000 at 6% APR with terms of up to 24 months. Sioux Falls Credit Union is offering a loan of up to $6,000 with 0% APR for six months with a 90-day payment deferral to members who have experienced a loss of income.

“You have to take into consideration the fees and the interest rate once the 0% introductory APR ends,” said Rosa, “but if it’s a short-term fix, this might be a good option.”

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