PERSONAL LOANS

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PERSONAL LOANS

Published by sam - 10/09/07 - 05:09:23 am

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A personal loan is generally taken out to pay for a specific expenditure—a vacation for example, or a major appliance, or perhaps a wedding. It is usually not secured by collateral and carries a higher rate of interest than an automobile loan, but it is often a less expensive form of loan than a credit card.

Because banks make greater profits with credit card loans, they tend to discourage personal loans—in part by raising the cards credit limits to $5,000, $10,000 and even $50,000. But compared to a personal loan, a credit card loan costs approximately two percentage points more in interest.

Since a personal loan is made to you in a lump sum that you have specified, it is likely that you have given some thought to what the money will be used for and have carefully assessed your need for the loan as well as your ability to repay it. In addition, if you meet the schedule of monthly payments of time. A credit card loan, by contrast, is not fixed either in its amount or in its repayment schedule.

In most other respects, a personal loan is like an automobile loan and justifies careful comparison shopping for the best rates, because rate differences within the same community are likely to be even greater than they are for automobile loans. Variable rate loans are available at somewhat lower initial rates, but they entail the risks that have been described in connection with adjustable rate auto loans.

As in the case of automobile loans, some banks offer a rate reduction for personal loans if you authorize the automatic deduction of payments from your checking or savings account. But, aside from the fact that this arrangement may force you to maintain an account that yields less than a similar account at a competing bank, it presents a further problem. Unlike an automobile loan, a personal loan is unsecured, and the bank may have the right to seized funds from your checking or savings account in the event that u default on your loan payments—an action it could not take is these accounts were held in a different bank. A careful reading of your savings and checking account agreements will disclose whether the bank has the “right of offset”.

Another type of loan—the savings secured or passbook loan maybe offered at a rate only two percentage points above the rate paid on your savings account because the account serves as collateral for the loan. This loan, however, does not cost you only the 2 percent, because you must forgo the interest payments on your savings account. Thus, if your savings account pays 5 percent and your loan interest is two percentage points above this rate; your actual interest cost is 7 percent. If, in fact, your savings balance is large enough to secure your loan, you could save on interest simply by using the balance instead of taking a loan.

The administrative costs for large and small loans being the same, banks prefer to make large loans, and typically offer reductions in interest rates with increases in the loan principal. This should encourage you to borrow all you need at one time instead of negotiating a series of small loans, but it should not lead you to borrow a sum larger than u need simply because the interest rate may be lower.

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September 10, 2007 | Loans, Banking |

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