Personal loans come with a higher interest rate than secured loans, because the very nature of the loans does not give the lender any assurance you will repay. Therefore, banks need to charge a higher interest rate to cover their losses for those who do not pay back the personal loan. That being said, it makes sense to get a secured loan whenever possible, but sometimes, a secured loan is not possible.
The Dos and Don’ts of Personal Loans
Sometimes a personal loan is necessary and a good decision. For example, a member of the family needs dental surgery not covered by insurance. The family member may need wisdom teeth removed, dentures, or a partial plate. All of these things cost between $1,000 and $3,000 and are necessary. This is the time to get an unsecured loan. Here are more Dos and Don’ts:
Do: Try to get a secured loan if possible (i.e. for cars). Get a loan for medically necessary procedures. Get a loan for emergency situations for which funds are needed immediately.
Use personal loans as a last resort only to be taken before deciding to take a cash advance on your credit card.
Don’t: Get a personal loan for unnecessary things (i.e. vacations, gambling). No matter how necessary the loan is, do not get a loan if you cannot pay it back.
Agree to a loan without finding out about extra charges for lateness, early repay, and insufficient funds.
Charges that Affect Personal Loans
Interest Rate – The interest rate is the most obvious charge associated with the loan. The rate will be considerably higher than a secured loan but less than a payday loan. Still, you want to shop around for the best rate possible.
Processing Fee – Sometimes it is referred to as an application fee. Whatever the bank calls it, you will be charged a fee for borrowing the money. Generally, it is about 1% to 2% of the loan amount. However, some banks charge a flat fee for all loans.
Early Payment Fee – Not all banks charge you extra for paying early, but this is something you need to know. In some cases, the fee can be enormous and should be avoided at all costs. In other cases, the bank will have a large early payment fee for a certain length of time and then will lift the fee allowing you to pay off the loan early.
Late Payment Fee – While some banks will allow a grace period, all banks will charge a fee for late payments. Find out what it is and avoid it as much as possible.