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.

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