Personal Loans: A Means to an End, a New Beginning, or None of the Above
By: Lisa Laprade
Published: December 2006
When we hear the term “Personal Loan”, the first thing that comes to mind is a bank loan of one sort or another. The money is used for any personal purpose- usually to buy or pay for something that isn’t typically covered under another type of loan, like an auto loan to buy a car or a student loan to finance a college education. Personal loans are usually considered to be “unsecured”, as there is no collateral for the financial institution to take if the loan is defaulted on. Since they fall under the unsecured category, the interest rates and fees paid are generally much higher than those on a secured loan, like one that uses collateral (auto or home).
While the above is true, there are many different types of personal loans that are gaining popularity across the country, even though many of them are considered to be “predatory lending”. This term has expanded to include deceptive loan practices in which the borrower is unable to repay and the lender repossesses the collateral and sells at a profit, or is unfamiliar with the high rates and fees that are attached to such an unsecured, personal loan. A prime example of such loan is a Cash Advance or Payday Loan.
Cash Advances and/or Payday Loans are relatively small denomination loans of under $1,000, but more commonly written for $500 or less. They’re taken out for a very short period of time of only a few weeks and fully repaid in just one installment. The fees charged are not based on the borrower’s credit report and score, but instead are in direct relation to the information on their personal paycheck. The cash advance lender takes the year-to-date totals to see not only how much money is made, but also how long the employment relationship has been in existence. This information allows the lender to calculate an “affordable” loan for the borrower.
And now for the bad news- Fees attached to such a loan are pre-designated dollar amounts for each $100 borrowed, with a national average of $20 for each two-week period. This means that borrowing $500 will have a fee of $100, and $600 will be due for payment in about two-weeks. Even though the cost of this might be cheaper than bounced checks and late fees, if you take the fee and change it into an average percentage rate, the triple-digit number percent will shock you.
On another note, student/college loans are another type of personal loans, as they are for a personal use and unsecured by a physical item like an auto or house – you can’t exactly have your education repossessed for non-payment. The government doesn’t exactly regulate these types of loans, but they do keep a watchful eye and offer many of their own to keep the competition up and the rates and fees down at an affordable level. Student loans are often deferred until the further education has been completed and adequate time has passed to find a job in the new field of endeavor, usually about six months.
On a final note, many folks think that getting a personal loan to buy a car is a good idea because of the auto insurance charged for any car with a note attached to it. This is a bad idea for several ideas, one of which is the interest rate charged for a car loan is significantly lower than a personal loan. Collision and other types of insurance are designed to help you in the unfortunate event of an accident, so it’s better to be over insured than to find out you don’t have enough coverage, still have a loan payment, and no transportation.