Many Americans, now more than ever, are learning how to save money. Faced with furlough, layoffs or cuts in pay due to the pandemic, they have been forced to find new ways to still pay their routine expenses.
According to the Labour department, up to 6.6 million U.S citizens filled first-time unemployment claims the week ending April 4. The country has now lost 10 percent of the workforce in three weeks. Even those who aren’t completely jobless may still be facing income loss.
If you happen to be in the same boat, you may need to borrow money in the near term to tackle immediate expenses. If you’re considering a personal loan, now may be the right time to move forward and take advantage of low rates.
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Is a personal loan a good solution during the COVID-19 crisis?
To better determine whether you may or not need a personal loan, let’s first understand how it works.
A personal loan is a loan you can use for any intent. In doing so, personal loans work much like credit cards – you borrow an amount whatever you need, but the interest you will pay on a personal loan will typically be much lower than what you will pay for a credit card. What’s more, if you happen to have too much credit card debt, it can affect your credit score, whereas a personal loan won’t affect it, given that you keep up with your monthly expenses.
A personal loan can be a possible solution during the covid-10 crisis now that interest rates have reached record levels. If you’re finding that you’re $500 shy every month on routine expenses, you may want to look for a $3,000 personal loan to pass through the next six months.
A few years back, personal loan interest rates swung between 10% and 28%. However, recently the normal rate on a 24-month personal loan from a commercial ban was only 9.5%. The figure is lower than May 2019, which witnessed a normal rate of 10.63% – which makes the personal loan a good solution if you need financial support during the COVID-19 pandemic.
Pro tip: Do your best to maintain your loan to a minimum, both to reduce debts and avoid falling behind on payments. Also, remember that you’ll need a steady credit score to secure a competitive rate on a personal loan. If you’re late with your monthly expenses during the crisis and your credit score has been affected, you may not qualify for a good personal rate.
Where can I get a personal loan?
Banks are probably one of the first places that come to mind when it comes to a personal loan. However, they are not the only type of financial institution that grants personal loans in times of uncertainty.
Consumer finance companies, credit unions, peer-to-peer lenders, and online lenders also offer loans to people who qualify.
How do I get approved for a personal loan?
If you plan on taking out a personal loan to cover unexpected expenses or an emergency fund, you need to have an impeccable credit score and credit history. To get the best rates, target a score of 660 or more. What’s more, your credit utilization score has to be lower than 50%.
The credit utilization score will show how much available credit you are using. For instance, when you have a total of $10,000 available between credit cards, with a combined balance of $5,000 between the three cards, your utilization is about 50%. And lending companies will look at your income as well. If you have a low credit score, you may still get approved for personal loans Canada if you choose a secured loan. A secured loan means you have to put either cash or an item as collateral – also you can ask a friend or a family member with a higher credit score to cosign the loan.
What is a good alternative to a personal loan?
Personal loans aren’t your only borrowing choice – if you own a property, borrowing against it through a line of credit or home equity will likely be more reasonable. As of early August 2020, the average interest rate for a home equity loan was just about 5% – which is significantly lower than the average personal loan rate. That said, if you own a home, it’s worth looking into.
With a line of credit or a home equity loan, your credit score will be less important, as your property is collateral for your loan. If you don’t make good on your loan payments, the lending company can push the sale of your home and get repaid through the proceeds. Definitely, that’s a terrible situation to land in, however a personal loan may be harder to qualify for than a home equity loan.
That said, if you don’t own a property, a personal loan will certainly be your good bet.
Interest rates and other fees
As we’ve previously mentioned, interest rates and fees can make a great difference in how much you return over the life of a loan, and they vary broadly from lender to lender. Here’s something to consider.
- Interest rate: Rates normally range from around 5% to 35% depending on your credit and your lending company. Usually, the better your credit score, the lower the interest rate will be.
- Prepayment penalties: Banks may sometimes charge a fee when you pay off your loan too early. The reason? For some lenders, early repayment means they’re missing out on some of the interest they would have otherwise earned.
- Origination fees: Lenders may sometimes charge a fee to cover the expenses of processing the loan. Origination fees normally range from 1% to 6% of the loan value.
Before signing your name on the dotted line, consider all the extra costs associated with the loan – not just the interest rate – to determine the overall amount you’ll be responsible for repaying.