Can a personal loan help in times of crisis? 5 questions to ask


Many Americans will soon receive stimulus checks, relieving the economic blow of the COVID-19 crisis. Money is a welcome help for some, but it may not go far enough for others.

A personal loan can help fill the void. Available from select banks, credit unions and online lenders, unsecured personal loans come in amounts starting around $1,000, and some lenders fund same-day or next-day loans.

But is it the right time to get a personal loan? Normally, you look at the interest rate as a primary deciding factor – and compare personal loans from multiple lenders to get the lowest rate. Now, with some lenders tightening qualification requirements and less stable earnings, there are additional questions to ask.

Will I qualify for an unsecured loan?

In response to the crisis, some lenders have increased credit rating and income requirements, making it harder 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 status, not just your credit score and income. They generally offer loans with more flexible terms than banks or online lenders, and the maximum annual rate allowed on loans from credit unions is 18%.

Some credit unions offer alternative payday loanswhich are small installment loans regulated by the National Credit Union Association with interest rates that cannot exceed 28%.

Online lenders: Borrowers with stable income and good credit (690 or higher FICO) have a better chance of qualifying for a personal loan with a online lender.

Bank lenders: Banks tend to have high credit and income standards for non-customers, but if your bank is among those offering personal loansyou can get 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 loanadding them to a loan application can increase your chances of approval or earn you a lower interest rate.

You can also request a secured loan, which lets you pawn something you own or a savings account to borrow money from. If you fail to repay the loan, the lender could take your property.

Is a personal loan a good idea?

Under normal circumstances, a personal loan is a good idea when it is used to improve your financial situation and you can commit to paying it back without straining your budget. A debt consolidation loanfor example, consolidates high-interest debt into one 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 bills is an expensive option and should only be considered after you have exhausted other cheaper options (see alternatives at loan below).

But unsecured personal loans are designed to be used for anything, so if you have a large, unexpected expense and need cash quickly, it might be a good idea during a crisis to consider a personal loan. In this case, aim for a loan with a rate and monthly payments that you are sure you can manage for the duration of the loan. Failure to repay a personal loan can significantly hurt your credit score and land you in court with a debt collector.

How do I get the personal loan that’s right for me?

Lenders have unique sets of qualifying 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 why you want 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 charged by the lender. It is repaid in monthly installments, so calculate your monthly payments to see how the loan fits into your budget. You can pre-qualified with most online lenders to see what rate and term you might receive.
  • How fast do you want to repay the loan? Repayment terms for personal loans are generally between two and five years. Longer repayment terms mean higher interest charges.
  • How soon do you need the funds? Some lenders specialize in rapid financing. They can fund a loan the same business day or within a few business days of 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 postpone or move your next payment date.

” MORE: Questions to ask yourself before rushing to a lender

Can I have more than one loan?

That you can get a second loan depends on the lender’s underwriting policies and practices. The main factors they consider if you get a second loan are your current debt-to-equity ratio and how much you have 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 authorizes a second loan or you obtain a loan from another lending company, keep in mind that your DTI ratio will be affected by the first loan. Lenders consider the DTI to be a good indicator of whether you will be able to repay your new loan on time. Most prefer borrowers with a DTI below 40%.

” MORE: Calculate your debt to income ratio

What are the alternatives to borrowing?

Credit card 0% APR: This is an option for those with good or excellent credit. If you pay back the amount you put on this credit card during the promotional period, usually 12 to 18 months, you will not pay any interest. The card may however have a high interest rate beyond this period.

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 setting up a payment plan or leaning on a medical bill advocate to help you pay off.

Lending Circles: An informal lending circle could be a way for friends and neighbors to support each other during difficult times.

At all times, even in times of crisis, avoid personal loans. Since payday loans have annual percentage rates that can exceed 300% and repayment terms typically around two weeks, borrowers may end up owing significantly more and face more difficult financial decisions than before. ‘to borrow.

” MORE: What is a personal loan?

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