Can a Personal Loan Help During a Crisis? 5 Questions to Ask
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Many Americans received government-issued stimulus checks providing relief from the economic hit of the COVID-19 crisis. The money was welcome assistance for some, but may not have stretched far enough for others.
A personal loan may help fill the gap. Available from some banks, credit unions and online lenders, unsecured personal loans come in amounts starting around $1,000, and some lenders fund loans the same or next day.
But is now a good time to get a personal loan? In normal times, you’d consider the interest rate as a primary deciding factor — and you’d compare personal loans from multiple lenders to get the lowest rate. Now, with some lenders tightening qualification requirements and incomes less steady, there are additional questions to ask.
Will I qualify for an unsecured loan?
In response to the crisis, some lenders have increased credit score and income requirements, making it more difficult for some borrowers to qualify for a loan or get a low rate. It also means shopping around for a loan is now more important than ever.
Credit unions: Credit unions consider your credit history and membership standing, not just your credit score and income. They typically offer loans with more flexible terms than banks or online lenders, and the maximum allowable annual percentage rate on credit union loans is 18%.
Some credit unions offer payday alternative loans, which are small installment loans regulated by the National Credit Union Association with interest rates that can’t be above 28%.
Online lenders: Borrowers with steady income and good credit (690 or higher FICO) have better chances of qualifying for a personal loan from an online lender.
Bank lenders: Banks tend to have high credit and income standards for non-customers, but if your bank is among those that offer personal loans, you may have access to lower rates and special features.
Other options to help you qualify: If a friend or family member is willing to co-sign a personal loan, adding them to a loan application can help your chances of approval or get you a lower interest rate.
» MORE: Personal loans with a co-signer
You can also apply for a secured loan, which lets you pledge something you own or a savings account to borrow the money. If you fail to repay the loan, though, the lender could take your asset.
Is a personal loan a good idea?
Under normal circumstances, a personal loan is a good idea when it's used to improve your financial position and you can commit to paying it back without stressing your budget. A debt consolidation loan, for example, rolls high-interest debts into a single payment and can help you pay off debt faster.
Even in a crisis, a personal loan used to pay bills like rent, utilities or medical costs is an expensive option and should be considered only after exhausting other, cheaper options (see alternatives to borrowing below).
But unsecured personal loans are designed to be used for anything, so if you have a large, unexpected expense and you need the money quickly, it may make sense during a crisis to consider a personal loan. In this case, aim for a loan with a rate and monthly payments that you're confident you can manage over the loan's term. Defaulting on a personal loan can significantly hurt your credit score and land you in court with a debt collector.
How do I get the right personal loan for me?
Lenders have unique sets of qualification criteria for borrowers, and each offers different features. The right lender for you depends on your credit, income, debt and spending habits, as well as the reason you want to get a loan.
Here's what to consider:
How much will it cost? The total cost of a personal loan is expressed as an annual percentage rate, which includes interest and any fees the lender charges. It’s repaid in monthly installments, so calculate your monthly payments to see how the loan fits into your budget. You can pre-qualify with most online lenders to see what rate and term you may receive.
How fast do you want to repay the loan? Personal loan repayment terms are usually between two and five years. Longer repayment terms mean higher interest costs.
How soon do you need the funds? Some lenders specialize in fast funding. They can fund a loan the same business day or within a couple of business days after approval.
What features are important to you? Some lenders focus their loans on debt consolidation and send the funds directly to your creditors. Others offer hardship programs that allow you to defer or move your next payment date.
Can I have more than one loan?
Whether you can get a second loan depends on a lender’s policies and underwriting practices. The biggest factors they consider if you're getting a second loan are your current debt-to-income ratio and how much you’ve already borrowed.
Instead of having a maximum number of loans you can get, some lenders cap the total amount you can borrow.
If your lender does allow a second loan or you’re getting a loan with a different loan company, keep in mind that your DTI ratio will be impacted by the first loan. Lenders consider DTI a good indicator of whether you’ll be able to pay your new loan on time. Most prefer borrowers with a DTI below 40%.
What are some alternatives to borrowing?
0% APR credit card: This is an option for those with good or excellent credit. If you repay the amount you put on this credit card within the promotional period — usually 12 to 18 months — you won’t pay any interest. The card may have a high interest rate beyond that period, though.
Local resources: Nonprofits, charities and religious organizations may be available for financial assistance in your state.
Payment plans: If medical bills are piling up, try to set up a payment plan or lean on a medical bill advocate to help with the repayment.
Lending circles: An informal lending circle could be a path for friends and neighbors to help one another during tough times.
At any time, even during a crisis, avoid payday loans. Because payday loans have annual percentage rates that can soar above 300% and repayment terms typically around two weeks, borrowers can end up owing a lot more and facing tougher financial decisions than before they borrowed.
» MORE: What is a payday loan?