loans and credit

Personal loans come in two varieties: secured and unsecured. The type you choose will depend largely on what you need the loan for, and how much you need to borrow. Personal loans are typically used to finance debts that other brands of loans cannot cover: for example, you can take out a mortgage to finance a home purchase, so you would not need to take out a personal loan to cover it. On the other hand, you might need to borrow money to furnish your new home; in that case, you might apply for a personal line of credit to fund your new furniture purchase.

Unsecured Personal Lines of Credit

An unsecured personal line of credit, or unsecured personal loan, is made by a lender without requiring collateral on the loan from the borrower. Collateral is valuable property the borrower pledges against the value of the loan. If the borrower defaults on the loan, the lender can collect the collateral and may keep it or try to sell it to offset the balance owed on the loan. Because unsecured loans pose a greater risk to the lender, they generally carry a higher interest rate than secured loans. However, they are the most common kind of personal loan to obtain, as borrowers usually use these funds to consolidate debt, fund large extraneous purchases, or pay off medical debt.

Secured Personal Lines of Credit

A secured personal line of credit, or secured loan, is made by a lender to a borrower who has pledged collateral against the value of the loan. This collateral must be liquid enough to be sold quickly and at some value in the event the borrower defaults. Common types of collateral include: jewelry, vehicles such as motorcycles or scooters, musical instruments, antiques, and the like. Because the risk to the lender is lower than with an unsecured loan, these loans generally carry a lower interest rate. On the other hand, the lender and the borrower may disagree about the value of the collateral; therefore, the borrower should have a written appraisal from a third-party available when pledging collateral against a loan.

Which Loan Type is Best for Your Situation?

Generally speaking, if you take out a secured personal loan, you should be prepared to lose your collateral; that is, don’t pledge a family heirloom if you may not be able to pay the loan back. Unsecured loans don’t carry the same risk to the borrower but they do cost more in the long run due to the higher rate of interest. Whether you take out a secured or unsecured line of credit, never borrow more than you can pay back within a reasonable amount of time.

Debt consolidation and settlement companies aren’t above misleading the public in an effort to drum up their business. Even the executive director of the debt-settlement industry’s major trade association admits this. As in any industry, the debt consolidation and settlement business has its share of bad actors. These companies try to trick consumers into debt consolidation or settlement services that they don’t need or can’t afford. They mislead consumers about the interest rates and fees that they’ll pay to either settle or consolidate their debt. And they do it all while claiming to act in the best interests of the customers. While most companies that operate in the debt consolidation business are legitimate and honest, the ones who aren’t give the entire industry a bad reputation that it never can quite shake.

Misleading Marketing

David Leuthold, executive director of The Association of Settlement Companies, a trade organization serving debt consolidation and settlement firms, recently wrote a letter to members about some of the misleading marketing practices that some debt relief companies are using to reel in customers. According to Leuthold’s letter, some companies are sending letters to consumers that are written on what appear to be government documents. Some even use logos that resemble existing government agencies or refer to their programs with names such as “U.S. National Debt Relief Plan.” Of course, none of these companies are officially affiliated with any government plans or programs. Consumers who assume they are may mistakenly work with them thinking that they are actually receiving relief from the federal government.

Educated Consumers

Consumers can protect themselves by asking the right questions before they work with any debt consolidation or settlement company. They should ask companies if they are affiliated with the federal or state government. They should ask if they are working on behalf of government programs. Most times, the answer will be “no.” This doesn’t mean that these companies are not legitimate, ethical providers of debt relief services. But consumers should enter an agreement with them knowing full well that they are for-profit, not government, entities.

Bad Reputation

The debt consolidation and settlement industry has long enjoyed a reputation on par with payday lenders, used-car salesman and personal-injury lawyers. Much of this reputation is undeserved. After all, debt consolidation firms serve an important function. They are often the option of last resort for struggling consumers. However, whenever companies in this business engage in deceptive marketing or other practices, they reinforce the notion that all the firms engaged in debt relief are scammers. It’s an unfortunate situation.

If you have a great deal of personal loans, they can actually harm your chances of getting a mortgage. So if you are ready to make that leap to buying a home, you should consider paying off your personal loans, as debt–even personal loans between family members–can be counted against you. As mortgages are harder and harder to get, the restrictions are getting tighter. You need to have a good credit record and low amounts of debt to qualify. Here are some ways to consider paying off your personal loans:

Begin with Small Loans First

Begin by paying your smallest debts first. You can choose to pay off the debts that carry the lowest rate of interest, as some financial experts recommend. Or you can begin by paying of the smallest debt in terms of money owed, as other financial experts recommend. The key is to choose a method that will allow you to experience a positive financial impact quickly, motivating you to keep going. This will help free up money for the down payment on your home and will help you pay down your personal debt ratio. Both will allow you to get a better interest rate on your mortgage when you submit your application.

Be Honest About Your Debt History

Once you begin paying off your personal loans, you may be tempted to leave a few off your credit report when you apply for a mortgage. But even if you owe money to a family member or a friend, you need to make sure your lender is aware of it. Failure to report all personal loans is a crime–it’s called fraud, and it can get you in a lot of trouble. Make sure that you accurately and truthfully report your credit history to your lender and you will be spared a lot of heartache in the long run.

Check Your Credit Report

Before you apply for any kind of loan, be it a personal line of credit or a mortgage, it’s a good idea to check your credit history. Credit bureaus are notorious for posting inaccurate and outdated information to consumers’ files, so it is worthwhile to check yours for mistakes before your lender gets a copy of it. If you do find mistakes, there is a 30-day window for the items to be corrected, so keep that time frame in mind when planning for your loan application. By cleaning up your credit and being truthful about your financial history, you have a much better chance of getting the funds you need.

The Wall Street Journal ran a grim headline recently that can only mean one thing: Debt consolidation firms better get ready for yet another influx of new business. The headline in question? It blared, in big, bold type, that the unemployment rate for adult males stood at an all-time high. This isn’t good news for anyone, even for adult females. The national unemployment rate is still hovering near 10 percent. That means that both males and females are struggling to find work. And there are precious few signs that the economy is going to improve. It should be little surprise, then, if future headlines trumpet the booming business that debt consolidation companies are enjoying.

Loans of Last Resort?

Many consider debt consolidation loans to be the loans of last resort, the ones that consumers turn to when there’s nowhere else to go. This may be true for the majority of borrowers. After all, the high interest rates and fees that go along with these loans don’t look so bad if they allow consumers to stop the collection agencies from calling. And, in all honesty, these loans are not inherently bad. If used properly, consumers can take all of their monthly debts, funnel them into one affordable loan and gradually pay off their creditors, without fear of losing their most valuable assets.

Bad Numbers

It’s a shame, though, that so many consumers need to turn to these loans. Again, though, this is no surprise. People who are out of work struggle to pay their bills. They rely on their credit cards to make more of their purchases. Those who do this for a few months suddenly find their debt levels rising. When they get too high, a debt consolidation loan may offer the only hope. Then there’s the bad news regarding the housing industry. Home values continue to fall. Many U.S. residents had the majority of their wealth tied into their homes. Now that a growing number of homeowners owe more on their mortgages than what their homes are worth – a story in the Wall Street Journal said that nearly 25 percent of homeowners were in this financial situation – the prospect of quick home equity loans to bail people out is no longer realistic.

Hoping For Better Times

The hope, of course, is that the stock market will continue rising, that consumer confidence will rise and that businesses, buoyed by such good news, will begin hiring again. But until this happens, and there’s no timetable in place for when businesses will regain their confidence, you can bet that the owners of debt consolidation businesses will see their profits rise.

Are you in a bad situation and think that personal loans can help you out? Or have you been approached by a family member asking for a personal loan? Sometimes an unsecured loan between family members is the only way you can pull yourself out of a desperate situation, if you are the borrower. If you are the lender, it may be the best way you can help a loved one who has gotten into terrible financial shape. If you are considering this option, there are a few things you must keep in mind:

Things to Remember for the Borrower

If you are approaching a family member for an unsecured line of credit, be sure to demonstrate your ability to pay back the loan and the responsible actions you will take when you spend the money. For example, approach with a written plan in hand with a repayment schedule already charted out. Be prepared to explain how you got into debt and the exact amount you will need to get back out. Be respectful and treat your relative as you would a loan officer; after all, they are putting themselves at great risk by making any personal loans. Finally, make sure you spend the money for the purpose it was given; for example, pay the credit cards and don’t take a sudden trip to Hawaii.

Things to Remember for the Lender

If you will consider personal loans to family members, you also need to make sure to protect your own assets. Make sure you can actually afford to give a cash advance and that if your relative never pays it back, you will still be financially solvent. Never lend more than you are willing to lose, and make sure you put the terms of the personal loan in writing. In this way, you can avoid the “It was a gift!” “No, it was a loan!” tug-of-war that has wrecked many families. Finally, you will need to let it go and hope for the best; if you can afford to, some financial experts advise gifting the loan if you feel your borrower has acted responsibly and won’t get into debt again.

Things to Remember for Both Parties

Lending and borrowing between family members is an emotional ordeal. It is not as clear-cut or as impersonal as securing a loan from a bank. But if both parties act responsibly, it can be a good temporary solution to financial woes. Both parties should draft the loan contract and sign it, and both parties should follow up in a respectful manner. For borrowers, this means making timely payments, and for lenders, this means you must refrain from directing and controlling the lender’s every move. Together, you can get out of a bad situation and strengthen your family ties.

Many people think that because America is in the midst of a recession, it is not a good time to purchase an automobile or other vehicle. However, despite the economic meltdown, people may have an easier time than they think to obtain financing for a vehicle. Of course, you’ll need to receive a regular paycheck in order to repay the loan and your credit score will be checked carefully. But, while it is true that lenders have been affected by the broad, sweeping credit freeze that set in after 2008, they are lending money to borrowers needing vehicles.

The question that needs to be asked is how much will it cost for your auto loan?

Now, more than in previous years, lenders are focusing on credit scores as a way of determining the rate of interest for auto loans. “…blemishes that didn’t used to be problems are problems now,” explained Mark Edelman, a partner in a Cleveland law firm which specializes in consumer finance. According to an online article appearing in an Edmunds.com series on auto financing, Edelman clarified that: “Mortgage payment problems on a credit record, for example, set off alarms…at auto-finance companies and lenders…” So, while obtaining an auto loan is possible, a real specific question that must be asked is: how much are you willing to spend on interest payments? If your credit doesn’t help you be considered as a “near prime” borrower, you should expect to pay higher interest rates than those offered to people with good or great credit. Higher interest rates, of course, mean higher monthly loan payments, which may make it harder to repay your car loan in a timely manner. What to do?

• Use Good Judgement. Before getting into a loan that may be difficult to repay, consider what your genuine needs are vs. what you want. You may need to delay your gratification or lower your expectations if your wants can’t keep up with your capacity to handle more debt.

• Get A Copy of Your Credit Report. If you truly need to get a car and an auto loan is in your immediate future, get a current copy of your credit report to be clear about how a potential lender may see you. Go looking for a car with no illusions about your financial reality.

• Clean Up Your Act (Credit Report). If you have some spots that indicate a less than acceptable credit history, try to get any wrong information off your report. And, of course, get payments current if they are not already so.

Bank of America recently announced that it would be making more mortgage modifications permanent. The bank’s announcement is part of a larger initiative instituted by the government last year. The Making Home Affordable Program was introduced to help alleviate the increasing pressure a plethora of homeowners find themselves under as they continue to struggle to keep up with their monthly mortgage payments. The program offers stressed homeowners two options to ease their burden.

Looking to Refinance

As a result of the plummet in real estate values, many homeowners now owe more on their mortgages than their home is worth. This prevents them from refinancing their mortgages to take advantage of today’s low rates. If you are current on your payments and satisfy the program’s other requirements, you may be eligible to refinance at a lower rate. To determine if you will benefit from a refinanced loan, talk to a mortgage lender to see what your new rate, monthly payment, and total cost of the loan will be and how that information compares to your current loan.

In Need of a Loan Modification

Homeowners who are struggling to stay current on their mortgage or are already behind on payments may qualify for a loan modification. A loan modification is a permanent change to one or more of the terms of the loan, providing the borrower with an affordable payment. A loan modification is beneficial to both the borrower and the lender as it prevents foreclosure on the home.

The Home Affordable Modification Program may prove to be a valuable tool in allowing homeowners to get back on track with their mortgage payments and keep their homes. To see if you qualify under one of the above scenarios, contact your lender or conduct research via the program’s website. Finally, be sure to avoid scams related to this program. No company should charge you fees to participate.

Many people think that because America is in the midst of a recession, it is not a good time to purchase an automobile or other vehicle. However, despite the economic meltdown, people may have an easier time than they think to obtain financing for a vehicle. Of course, you’ll need to receive a regular paycheck in order to repay the loan and your credit score will be checked carefully. But, while it is true that lenders have been affected by the broad, sweeping credit freeze that set in after 2008, they are lending money to borrowers needing vehicles.

The question that needs to be asked is how much will it cost for your auto loan?

Now, more than in previous years, lenders are focusing on credit scores as a way of determining the rate of interest for auto loans. “…blemishes that didn’t used to be problems are problems now,” explained Mark Edelman, a partner in a Cleveland law firm which specializes in consumer finance. According to an online article appearing in an Edmunds.com series on auto financing, Edelman clarified that: “Mortgage payment problems on a credit record, for example, set off alarms…at auto-finance companies and lenders…” So, while obtaining an auto loan is possible, a real specific question that must be asked is: how much are you willing to spend on interest payments? If your credit doesn’t help you be considered as a “near prime” borrower, you should expect to pay higher interest rates than those offered to people with good or great credit. Higher interest rates, of course, mean higher monthly loan payments, which may make it harder to repay your car loan in a timely manner. What to do?

• Use Good Judgement. Before getting into a loan that may be difficult to repay, consider what your genuine needs are vs. what you want. You may need to delay your gratification or lower your expectations if your wants can’t keep up with your capacity to handle more debt.

• Get A Copy of Your Credit Report. If you truly need to get a car and an auto loan is in your immediate future, get a current copy of your credit report to be clear about how a potential lender may see you. Go looking for a car with no illusions about your financial reality.

• Clean Up Your Act (Credit Report). If you have some spots that indicate a less than acceptable credit history, try to get any wrong information off your report. And, of course, get payments current if they are not already so.

For some people, it’s hard to imagine surviving more than a day or two without using a credit card. For many, credit card usage is a part of their financial routine. However, there are still people out there who stay away from credit cards completely and the number of people reducing their credit card usage is growing. Through October of 2009, the number of new credit card accounts was down 46% compared to the first ten months of 2008. In November, revolving credit was down 20% from a year earlier. These statistics reflect tighter credit standards in general, but also a growing number of people learning to live without credit cards.

Living without credit cards isn’t easy though and it will be an adjustment for anyone who has relied on credit cards in the past and it’s probably a good idea to at least have access to a credit card for emergencies. It’s difficult to do simple things like renting a car or checking into a hotel without having a credit card on file. Many consumers use debit cards for these types of purchases, but they run into problems with companies refusing to take debit cards or putting huge amounts of money on hold and creating overdrawn checking accounts. Here are some of the reasons people are trying to become less reliant on credit cards.

Anger at the Credit Card Industry: A lot of people feel some personal bitterness toward credit card issuers after feeling like they pulled the rug out from under consumers in the toughest possible economic environment. There’s a sense that credit card issuers can’t be trusted and that we should be able to survive without them. New laws designed to protect consumers and better regulate the credit card industry are helping to restore confidence in creditors but there are still people upset about the business practices that they’ve witnessed over the past two years.

Wider Debit Card Use: Before debit cards were available, the choices for people without credit cards were to use cash or write a check. Both were common, but debit cards provide quick, easy, and safe access to the funds in a checking account and their usage is growing every year. In a recent survey, 46% of respondents said that using debit cards helped them to control their spending and 28% reported that they were using credit cards less and debit cards more frequently.

Desire for Less Debt: There are enough horror stories about people allowing their debt to spiral out of control and becoming slaves to their credit card payments that consumers are getting smarter when it comes to credit card use. A recession and high unemployment like we’ve seen over the past few years scares people and although the economy is recovering, people are reining in their spending habits and taking control of their debt situations. Paying off debt can ease your financial stress and allow you to control your finances instead of allowing your finances to control you.

Personal loans can be difficult to obtain through traditional channels, such as your local bank or credit union. In fact, as the economic crisis has deepened, it has become harder and harder to secure a personal loan through those institutions, and interest rates have climbed higher and higher. Many potential borrowers are also reluctant to borrow from friends and family members, as the loan usually puts a strain on the relationship. So if personal loans aren’t available from banks or from family members, how can you obtain one?

Peer-to-peer lending, also known as person-to-person lending or social lending, has recently gained popularity due to the very circumstances that make personal loans so difficult to get through normal channels. This type of lending offers the third-party neutrality of a banking institution with the less formal requirements and restrictions on lending that you might have gotten with a family loan.

How Peer-to-Peer Lending Works

Peer-to-peer lending has two common models: marketplace and family and friend. The difference between the two models is thus:

Marketplace lending–a potential borrower logs onto a website and applies for a loan; the lender who is willing to give the lowest rate of interest “wins” the loan. This is akin to the “auction-style” of other well-known marketplaces such as eBay, but in this case, the loan is the good being sold.

Family and friend lending–in this model, borrowers connect with family and friends who know each other already. The lenders pool together to finance the loan, formalizing the process of a typical personal loan between friends or family members.

In both cases, the lender and borrower benefit from the ability to formalize the transaction. It also allows borrowers who might otherwise be overlooked by traditional institutions to secure a personal line of credit. On the other hand, there is the potential for fraud on both sides, if neither party is careful.

Two Types of Personal Loans

There are 2 types of personal loans that one can obtain through peer-to-peer lending:

Secured line of credit–in which a borrower pledges collateral against the value of the loan. If the borrower defaults on the loan, the lender can then claim ownership of the collateral to offset his lost cash investment.

Unsecured line of credit–in which a borrower does not have to pledge anything against the value of the loan. Since this poses a greater risk to the lender, interest rates on unsecured loans are generally higher than on secured loans.