Which Types of Loans are the better Options in the Actual Social and Economical Context?

These are difficult times economically speaking and unemployment rates might soar in the next weeks because of the coronavirus pandemic. The government and federal regulators are trying to get cash moving and encourage people to spend and buy as usual; otherwise the economy might arrive at a dangerous standstill.  

This is why there is a new initiative in the works: more small personal loans and lower rates. Are banks going to agree to this? Let’s see!

More responsible small-dollar loans for consumers and small businesses

A joint venture of five federal agencies announced that they will encourage financial institutions to offer more open-end lines of credit, single payment loans or installment loans paid back over a specific duration. They say they need to offer “fair treatment of consumers” and should be “consistent with safe and sound practices”.

So, if you are considering a loan in these troubled times, here’s how to make sure you choose the best option.

Consider the interest and the period of time more than anything

Now, more than anything, you should really look at what the loan charges. You shouldn’t go for a loan that asks for more than 36% interest and also, you shouldn’t settle for a loan that does not give you a reasonable period for paying it back evenly. Small dollar loans can help you in the short time, but the credit needs to be structured in even, affordable installment payments, in a reasonable timeframe.

Do not be tempted to go for small-dollar loans that ask to be repaid in a single installment. A good example of a responsible loan might look like this: $1,000 for a period of three months and a charge of $12 for every $100 borrowed. However, in the times of this actual pandemic, banks have cut down their fees to $6 per $100 borrowed, and the APRs have been reduced to 2.99% for personal loans not bigger than $5,000.

You can get to an even lower interest rate if you try a federal credit union

 Credit unions are now offering interest rates of a maximum of 18%. For a three-year loan, the average rate is somewhere around 9.37%. However, credit unions have their downsides, like you need to live in a specific area or work for a specific employer to be able to loan from them.

Credit cards are also good for small loans

Credit cards are basically small loans which charge interest of about 17%.  With a few calculations, you will come to the conclusion that they are cheaper than many other small loans. Moreover, if you pay your balance off in a period of 20-30 days, you actually have interest-free loans. Many banks have made credit cards more available these days, so maybe you should consider this option in order to bolster your finances a bit during the coronavirus pandemic.

Credit cards are really useful as additional spare cash during precarious times and they’re easy to rely on, as long as you make a plan that will allow you to pay off your balance in due time.

Understand the difference between line of credit and revolving credit

It is necessary that you can tell the difference between a credit card and a loan. A credit card is implicitly a line of credit you can use to make certain purchases. A credit card is an unsecure line of credit, meaning you do not have to pledge any asset when you open the account, but you do have a credit limit on it.

The best advantage of a credit card as compared to a traditional loan, is that it has a certain kind of flexibility and might even offer a lot of other conveniences and bonuses. First of all, you have a 0% interest period and can get little rewards from time to time. If your account looks good, you can get a credit limit increase on a regular basis. So this means you will have a bigger “cash pool” to spend in times of need.

Credit cards are also a good solution for people who have poor credit rates. They offer the possibility to better the credit terms in time.

Bottom line

There are many ways to borrow money and especially in these times you need to measure your options and make the right decision. Credit cards have their advantages and disadvantages. Such are the federal credit unions and small-dollar loans. Personal loans have usually lower interest rates than a credit card; however, they lack the flexibility that these times ask for. Besides, if you can keep the balance right, you might not even pay interest on a credit card.

In the end, the most important thing is that you take care of yourself and finances, keep an eye on your credit score and stay home to stay safe.

The Ins And Outs of the Most Popular Type of Debt in the U.S.

Personal loans have been around for quite some time, however, they are now becoming more popular than ever. This is mostly due to the fact that using them to borrow money from the bank is often considerably cheaper than other financing options.

To put things into perspective, the total personal loan balances have hit $156 billion by the end of 2019, showing that more and more people are borrowing money from banks, rather than using credit cards or credit lines. Furthermore, the average balances for personal loans usually range between $16,000 and $20,000.

This having been said, the accessibility of these loans makes them both useful and attractive, but are they good for your particular needs?

An in-depth look at how personal loans work

The simplest way to define a personal loan is an amount of money that an individual borrows from a bank that must be paid back over time. In other words, the terms and conditions that you have to agree to get the loan will contain a set of monthly payments that you must make, up to the point where you have returned the money, plus interest.

To qualify for a personal loan, you must have a good credit score. This means that you will have to have a good relationship with the bank and also have used banking services for enough time to build a decent financial history. The higher your credit score is, the greater your chance of getting approved will be. Your credit score will also affect the monthly interest rate that you will be offered.

So, what are personal loans good for? The answer is simple: for anything that you need. Banks never place any restrictions on what you can do with the money, making the loans great if you need to purchase expensive products, to invest in a company, to pay the rent, or even to go on a vacation. Unlike other types of debt such as auto loans that can only be used to finance vehicles, personal loans do not have any strings attached, other than the fact that they must be paid on a monthly basis.

A large number of individuals are also using personal loans to consolidate their existing debt. Generally speaking, this means using the money from the personal loan to repay different ones and to top off your credit cards. This is useful mainly because this type of debt has much lower rates than others.

Why personal loans are great alternatives to using credit cards and credit lines

As far as using personal loans in favor of credit cards or credit lines is concerned, the single, most important thing worth remembering is the fact that the money does not count towards your credit utilization rate. This means that borrowing money through a personal loan will not have a negative impact on your credit score unless you are late with your monthly payments.

Furthermore, owing balances on your credit cards may prevent you from doing balance transfers. Personal loans do not come with any restrictions of this sort.

What are the disadvantages of personal loans?

For all the flexibility that personal loans offer, they also come with considerable disadvantages that you have to keep in mind before borrowing large amounts of money. The biggest one is that you may get stuck with a very high interest rate, especially if your credit score isn’t too great.

As a side note, if your credit score is too low to get a decent monthly interest rate, you will be able to get someone that has a better financial track record to cosign the agreement. This means that another individual will put up his credit score and vouch for you, agreeing to make the monthly payments if you are unable to. In return, your chances of having your loan approved will be greater and you may also get a better monthly rate.

It is also important to keep in mind that some lenders may penalize you if you want to pay off a personal loan early, keeping you stuck until the end of the agreement.

Conclusion

Personal loans are great if you want to avoid using your credit cards and they are considerably cheaper than other types of financing. Furthermore, they do not come with any restrictions in terms of what you can do with the money.

Overall, they are great ways to get money if you need to purchase expensive products, to pay your rent, to invest, or if you need funds to go on a vacation. This having been said, although the loans do not count toward your credit utilization, they can still lower your credit score if you do not make the monthly payments on time.