A Guide to Personal Loans

There are things you should know not to say on your personal loan application, as well as some things you should know before even applying.

Here’s a frightening statistic: About 43 percent of U.S. families spend more than they earn each year. It’s little wonder, then, that personal bankruptcies have more than doubled in the last decade.

It’s little wonder, too, that a growing number of consumers are seeking personal loans to help bail them out of financial trouble. Of course, personal loans can be troublesome. These loans are considered unsecured. This means that borrowers don’t bring any collateral to back them up. Because of this, they usually come with higher interest rates.

Consider a mortgage loan. This type of loan is a classic secured loan, backed up by a particularly big piece of collateral, the borrower’s home. If the borrower defaults on the loan, the lender has something to take, the house. Because of this extra protection, lenders can afford to charge lower interest rates on mortgage loans. Auto loans, too, are an example of a common type of secured loan. In this case, the car acts as collateral. If borrowers default on their auto loans, the lender can take their vehicles.

With personal loans, there is nothing for lenders to take. Therefore, to give themselves a bit more financial protection, they charge higher interest rates. It’s why financial experts recommend that consumers rely on other sources first when they need extra cash. In other words, personal loans should be a loan option of last resort.

But is that how consumers use them? Do they only turn to personal loans as a last resort? Unfortunately, not always.

The main reason why consumers take out personal loans is for debt consolidation. Coming in second? To buy a vehicle. Also ranking high, in third place, in fact, are home improvements.

None of these represent life-or-death purchases. So consumers tend to pay high interest rates for purchases that they can either handle in some other way – such as taking out a standard auto loan to purchase a vehicle – or put off.

Those consumers who insist on taking out personal loans, though, have plenty of options from which to get them. They can take out short-term personal loans from banks or other lenders. They can visit their local payday loan shop, if they don’t mind paying as much as 400 percent interest on the money they borrow. They can take out Christian lending, second chance or no-credit personal loans.

Borrowers, though, need to know that no matter what type of personal loan they take out, they will have to pay higher interest rates.

Those consumers who feel as if they have no other choice but to apply for personal loans, can follow several tips to increase their odds of actually receiving approval from lenders. First, young borrowers should never tell lenders that their parents won’t cosign on the loan. This might cause lenders to doubt your trustworthiness. After all, if your parents don’t trust you enough to cosign …

Secondly, borrowers should not mention that they are seeking a personal loan to make a down payment on a big-ticket item without also explaining how they are going to pay for the rest of the money to purchase the item. This might cause lenders to wonder how you’ll ever pay them back.

Financial experts also recommend that consumers never beg for approval from a lender. This makes borrowers look desperate. It also gives lenders a clue that borrowers may have already burned through their other lending options.