The Basics of Personal Loans

What is a personal loan?

There are two types of loans that are typically considered to be debt consolidation loans: home-equity loans, which allow you to take a loan against the value of your home, and personal lending, which is usually not supported by a home, property, or other form of collateral. Personal lending is based on the borrower's past and current credit history, job standing and promise to repay the loan.

What are typical interest rates on a personal loan?

If you are in good credit standing, you can expect to pay interest rates of approximately 14% to 15% on your personal loan. If you have accumulated large debts or have credit challenges, you may be expected to pay more; 18% to 21% and above. You can also be asked for upfront fees that could range near 10% of the total loan. It is best to shop around for a loan and find the best arrangement for you.

When is it appropriate to take out a personal loan?

Personal loans are in your best interest if you can get a low-rate loan and pay off your debt in a shorter amount of time. Lower monthly payments may mean a longer pay back time. This will inflate the amount that you are ultimately paying. Make sure that you are not paying more in the end. 

How much responsibility is a personal loan?

Many people complicate their debt problems by running up their credit balances even after they have consolidated their older debt, by debt consolidation loans. This is unwise, as people actually end up adding more to the debt that they already have and bring themselves closer to bankruptcy or a financial breakdown.

Once you have taken out a personal loan, it is your responsibility to maintain clear communication with your debtor and honor your good standing. There is no need to default on a personal loan. If you are falling behind on your payments, borrowing money from friends, tossing your unopened bills on your desk or not answering your phone for fear that it may be a creditor calling, it is time to reevaluate your budget and honestly access the situation. If what you find seems overwhelming, it may be time to schedule a meeting with your loan creditor to talk about your options.

What should I do if I cannot make my loan payments?

If you are experiencing temporary setbacks, such as unexpected car repairs or other unpredicted expenses, it may be helpful to secure a short-term deferment or forbearance on your personal loan. This will allow you to put a temporary hold on your payments or allow you to pay smaller monthly payments until you are able to continue at your original terms. In most cases you will still be responsible for the growing interest rates and will continue to make payments, albeit at a much lower monthly amount.

Deferment or forbearance can also be an option if you are experiencing major life changes or unforeseen long-term financial stress. If you are having a problem repaying your loan the best solution is talking directly and honestly to your lender. It may seem easier to ignore the phone calls and ignore the bills, yet communication with your lender can go a long way in keeping your loan account in good faith.

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