5 questions to ask if you are considering a personal loan in times of crisis


Many Americans will soon be receiving government-issued stimulus checks, easing the economic blow from 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 some banks, credit unions and online lenders, unsecured personal loans come in for amounts starting around $ 1,000, and some lenders fund same or next day loans.

At all times, even in times of crisis, avoid payday loans.

But is now the right time to take out a personal loan? Normally, you would see the interest rate as the biggest deciding factor – and compare personal loans from multiple lenders for the lowest rate. Now, with some lenders tightening qualification requirements and less stable income, there are more questions to ask.

Will I be eligible for an unsecured loan?

In response to the crisis, some lenders have increased their credit scores and income requirements, making it more difficult for some borrowers to qualify for a loan or get a low rate. It also means that shopping around for a loan is now more important than ever.

Credit unions: Credit unions consider your credit history and membership, not just your credit score and income. They generally offer loans with more flexible terms than banks or online lenders, and the maximum annual percentage rate allowed on credit union loans is 18%.

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

Online lenders: Borrowers with a stable income and good credit (690 FICO or more) have a better chance 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 it to a loan application may increase your chances of approval or give you a lower interest rate.

You can also request a secured loan, which allows you to pledge something you own or a savings account to borrow money. If you don’t repay the loan, however, the lender could take your asset.

Is a personal loan a good idea?

Under normal circumstances, a personal loan is a good idea when used to improve your financial situation and you can commit to repaying it without stressing your budget. A debt consolidation loan, for example, consolidates high interest debt into one payment and can help you pay off your debt faster.

See: “I’m terrified of losing everything I’ve worked for. This woman found a new job, bought a car and was put on leave due to the coronavirus

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 exhausting other cheaper options (see alternatives to loan below).

But unsecured personal loans are designed to be used for anything, so if you have a large and unexpected expense and need the cash quickly, it may be a good idea to consider a personal loan during a crisis. In this case, aim for a loan with a rate and monthly payments that you are sure you can manage over the life of the loan. Default on a personal loan can drastically harm 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 qualifying criteria for borrowers, and each offers different characteristics. Which lender is right for you depends on your credit, income, debt, and spending habits, as well as why 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, which includes interest and any fees charged by the lender. It’s paid off in monthly installments, so calculate your monthly installments to see how the loan fits into your budget. You can pre-qualify with most lenders online to see the rate and term you might receive.

  • How fast do you want to pay off the loan? The 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 quick financing. They can fund a loan on the same business day or within two 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.

Can I have more than one loan?

Whether you can get a second loan depends on the lender’s underwriting policies and practices. The main factors they take into account if you get 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.

Also on MarketWatch: Debt collectors go after millions of stimulus checks – 5 ways to stop them

If your lender authorizes a second loan or if you get a loan from another loan company, keep in mind that your DTI ratio will be affected by the first loan. Lenders see the DTI as a good indicator of whether you will be able to pay off your new loan on time. Most prefer borrowers with a DTI below 40%.

What are the alternatives to borrowing?

0% APR credit card: It is an option for those with good or excellent credit. If you pay back the amount you put on that credit card during the promotional period, usually 12-18 months, you won’t pay any interest. However, the card may have a high interest rate beyond this period.

Local resources: Nonprofit organizations, 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 letting a lawyer help you pay off.

Loan circles: An informal lending circle could be a way for friends and neighbors to help each other through tough times.

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

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