At present, the interest on an unsecured personal loan is currently over 15% per year, says BankRate.com, assuming you can get this type of loan at all in today’s credit-starved environment. And that’s about your best such rate. Attempt to borrow against a credit card, for example, and it could be a good deal more. It’s obvious that personal loans can get very expensive nowadays.
In many situations, though, a personal loan can be just about unavoidable for many of us. What if the car won’t start and you need an expensive engine repair to get it up and running again? Or your daughter needs braces? Or the washing machine breaks down?
Situations like these force many Americans to resort to personal loans, including high-cost payday loans. These loans now make up over 22% of the total non-mortgage installment loans at U.S. banks, up from only 11% in 1998.
However before you sign up for your next personal loan, consider the following alternative possibilities —
– Consider a home equity loan. If you own a house with equity in it, you can probably borrow against the equity at a fairly low interest rate and at the same time get a tax deduction. Check out LendingTree.com for a list of lenders.
– Selling stocks, Treasury bonds, etc., can be a fast way to drum up some hard cash – just be sure you understand you’ll have to pay taxes on any gains or interest.
– What about borrowing against your cash value life insurance policy.? This is a low-interest alternative if you have this type of policy, and it’s the most common type.
– Try borrowing against your retirement account. Ask your employer’s benefits department if this option is available. If so, it’s another low-interest alternative.
– Family or friends. Maybe your dad can fork over some cash. Just make sure you pay him back.
– Ask your creditors – particularly local merchants who may be more flexible – if they might be willing to extend your payments a month. If they are, make sure you’re not getting charged extra for the privilege of paying your bill late – or if you do get charged, find out how much.
– How about asking your employer for a pay advance – assuming of course you have an understanding employer.
Good vs Bad Debt
You need to recognize a simple fact of personal finance: Never borrow money for consumption. That’s bad debt. Only borrow for investments that will increase in value (and increase by more than the cost of the loan). Borrowing money just in order to spend it is a terrible idea, a royal road to bankruptcy or other financial land mines. As Eric Tyson says in his book, PERSONAL FINANCE: slickcashloan.com
If you spend, say $2,500 [which you’ve borrowed] on a European vacation, the money is gone. Poof! You may have good memories and even some Kodak moments, but you’ll have no financial value to show for it… I’m not saying don’t take a vacation. Definitely, take one, two, three, or as many as you can afford yearly. But that’s the point – what you can afford. If you need to borrow money… [then you can’t afford the vacation]…
And precisely the same advice applies to almost any consumer purchase: home computers, expensive meals, clothes,, yes, even a new car – anything that decreases in value and eventually becomes financially worthless. If you have to borrow to buy it, you probably can’t afford it. According to Tyson “The financially correct amount of bad debt [you should have] is zero.”
But this does not apply to things that “retain and hopefully increase in value over the long term, such as an real estate, education or your own business.” For these uses, debt is acceptable, up to a limit – the limit being the point at which making payments causes you to be no longer able to save sufficiently to accomplish your financial goals.
All that is excellent advice, but the fact is that, at times, you simply may not be able to avoid adding to your debt load – an emergency or other urgent situation forces you to seek a personal loan. In those kinds of situations, what are your best options