Old-School Personal Loans Make A Comeback

Out of the soil of the post-apocalyptic credit graveyard shoots the skeletal hand of a forgotten lending practice. Banks are once again busting out “personal loans” to help finance what might otherwise be just out of reach for consumers. Here’s how they work:

1. You borrow a lump sum
2. The interest rate – how good it is depends on your credit score – is fixed for the term of the loan
3. You make the same payment every month…
4. …Until the loan is paid off.
5. The End.

No variable rates or juggling rates for different purchase categories, and no losing your house. If you fail to make good, of course there are late fees and collection agencies. Otherwise it’s pretty straightforward. So is paying in full and in cash, but it’s interesting to see how banks are creeping back into lending.

A Personal Loan: Better Deal than a Credit Card? [Moneywatch]

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  1. Jfielder says:

    I used a personal loan to buy a new dirt bike a few years ago. The interest rate was better than what Yamaha wanted to charge, plus it was unsecured…. Although the bank knew I was using it for a dirt bike and kept trying to get details on it out of me, like “where do you keep it?”, “what is the make and model?”, “what is the VIN on it?”. I ended up telling them “it’s called a personal loan for a reason, mind your own business”.

  2. c!tizen says:

    “1. You borrow a lump sum
    2. The interest rate – how good it is depends on your credit score – is fixed for the term of the loan
    3. You make the same payment every month…
    4. …Until the loan is paid off.
    5. The End.”

    Wow, what a concept! If only they had thought of this befo… oh.

  3. mwshook says:

    Buyer beware. I had a credit card with 14% interest, and moved it onto a personal loan with a fixed rate of 11.45%. Now the credit card is 9%. (my credit improved a lot in the last 4 years)

    • Tim says:

      That’s assuming the bank would have lowered the interest rate on the existing balance.

    • opticnrv says:

      So what’s stopping you from channeling all your daily spending through the credit card with 9% interest until it reaches the amount still owed on the personal loan while simultaneously using that unspent money to pay of the outstanding balance on your personal loan? Money is just an energy. You just need to learn how to channel it.

      • Elcheecho says:

        what if they’re already using the credit card for all their spending?

        • AustinTXProgrammer says:

          If they are talking about interest rates I would hope that means they are paying the card in full. Stop, and pay all of that towards the personal loan..

          Otherwise they have a personal loan and are taking on additional consumer debt. And all the readers here know better.

    • Pax says:

      What’s stopping you from putting a payment for the entire balance of the loan, on your now-lower-interest credit card?

      • rekoil says:

        That most likely counts as a cash advance which almost always has a 1-2% transaction fee attached to it, and often has a higher interest rate as well.

    • RipCanO'Flarp. says:

      BUT remember a personal loan WILL be paid off when the term is up. Even though your CC may have a lower interest rate- it’s called revolving credit for a reason and the term is indefinite.

  4. kc2idf says:

    I have used one to pay for some necessary car repairs. It was for only $600 and paid off in just a few months. The interest rate was pretty low, but it made the difference between having a working car and not.

    Of course, this was from a credit union, not a commercial bank, and they don’t seem to have any interest in trapping customers into ridiculous products.

  5. Tim says:

    I’m curious about these … does the interest rate and/or chance of getting the loan approved depend at all on what you need to money for? In other words, is it better to borrow money for your sick grandmother’s medical bills vs. a sick entertainment system?

    • Cheap Sniveler: Sponsored by JustAnswer.comâ„¢ says:

      I took out one from my credit union a few years back. No questions asked.

    • ARP says:

      No, I think the focus is more on your ability to pay. Most other loans are asking that to determine if there’s something they can attached a security interest to (few do it, but the option is there).

    • dangerp says:

      Nope. They might ask you a general category, but it’s just for their own information (reporting, marketing, etc). It isn’t used to determine whether to give you the loan. They only care about your income and credit. I’ve gotten personal loans through credit unions and Citibank. I prefer credit unions for purely moral reasons, but citibank was painless and reasonable.

    • mac-phisto says:

      i’m going to go against the grain here & say yes, it does matter. at my FI, we mostly don’t care what you use the money for, but we have certain “unqualified purposes”. for example, we don’t lend money to people for moving expenses or to catch up on their bills. nor do we lend for rent payments or security deposits. we can’t lend for a down payment on a house (b/c that’s this little thing known as “mortgage fraud”) or for a car (i know that sounds silly, but people try that all the time). outside of that, it pretty much doesn’t matter.

      something else to think about: HMDA compliance. the “home mortgage disclosure act” requires banks to disclose lending practices concerning virtually anything to do with a home. this includes personal loans used for “home improvement” purposes (or so the regulators insist). while i don’t know of institutions that create road blocks specifically for home improvement personal loans, i could see some institutions making these loans more difficult to obtain so as to avoid having to comply with HMDA regulations.

      • mac-phisto says:

        that one sentence sounds like we can’t lend…for a car, but it’s meant to say we don’t lend for the down payment on a car.

        most places will issue personal loans for vehicles if the vehicle doesn’t meet their collateral requirements, but not to finance a down payment so that you can obtain a loan thru another lender.

  6. theblackdog says:

    I used a personal loan a few years ago when I got into some financial trouble, but it really was not worth it. BofA limited the loan to $3000, and the interest rate was 13%, though they dropped it to 12.5% if I let them auto-debit my account.

    I used a later windfall to pay off the loan over a year early (I think I was on month 22 of 36) to get out save on the interest.

    USAA also offers a personal loan with similar terms, but I won’t take it now. Also, since I cleaned up my credit cards, they have dropped to 9-10% so they’re less than the 12.99% fixed that I keep getting pre-approval offers for from USAA.

    • Xzigraz says:

      I don’t get it, why can’t you pay off your credit card every month? Don’t spend the money you don’t have.

      • Spellchk says:

        You don’t have to get it. We are not here to make up for your lack of understanding. If your unable to figure out that “things happen” then there is no hope.

      • theblackdog says:

        RTFC stupid, I said I had paid off the loan early and cleaned up my credit cards.

  7. YamiNoSenshi says:

    I was looking into one of these when I was getting out a college. I had a good job lined up, but I needed cash for initial payments so my lady and I could get a place to live. I ended up taking one out from the First National Bank of Mom, which I paid back in a few months. The interest rate was nice, but the collections agents…

  8. AngryK9 says:

    Probably want to avoid the bank if the loan officer’s name is Corleone…

  9. dangerp says:

    I just got a personal loan to pay for our air conditioning. Easy as pie, did it through the local credit union, and didn’t affect my home’s equity (in a negative way, anyway). I’ve used personal loans in the past, and as long as you are responsible with them and pay them off as soon as possible, they are a great thing to have.

  10. quijote says:

    Props to Ben on that first sentence. Made me laugh.

  11. grumpskeez says:

    I got my GF to do this to pay off a high interest BOA card that she had amassed a good deal of debt on. BOA was charging her something like 20% on 18k. Our CU gave her a loan at 7% and she paid the card off and had BOA reduce the limit to 2k. She’s a little over a year into paying it off and has a couple to go but she’s happy seeing her debt portfolio shrinking monthly.

  12. lawnmowerdeth says:

    Sounded good until the 13% part. I remember when credit cards were fixed at 6%, and this is well before the time of the Fed keeping rates below 1%…

  13. intense_jack says:

    I used a personal loan to clear up a bunch of credit card debt. It took about 8 months, but it was paid off and at 8% interest instead of the 20% interest my wife had with the card. What was cool was the gal on the phone at my credit union suggested it after I told her what was going on and how I couldn’t get a secured loan (car as collateral) under 12%.

  14. Horselady says:

    This is great news.
    I’ve often wished I could get just a small loan from my bank
    instead of having to use credit card!

    I’m all for EASY & simple.
    They could even deduct pymt right from my acct once a month

    Love it.

  15. packy says:

    This has always been the kind of loan I’ve had. I’ve never had a variable rate thingie except whatever credit card I’ve got (and I really only have two–my oldest card, which is from my credit union and I keep open for a “length of credit history”, and whatever card I’ve got at the moment for using).

    Then again, I’ve banked exclusively at credit unions since I was a teen.

  16. The cake is a lie! says:

    Are these the old “signature loans” of back in the day? I used one of these to get out of debt when I got married. We got a signature loan for the amount of all of our debt (about $11000) and lived like paupers for about two years while we paid it off by paying $600 a month towards it. It worked out great and was a lot better of an option than anything else we had available to us back in that time.

    • humphrmi says:

      Yep, Personal Loans AKA “Sigs” or Signature Loans. Called that because there’s usually no collateral – only your signature guarantees repayment. I love them.

  17. balthisar says:

    My second mortgage is effectively a signature loan now. Yeah, there’s the lien, but it’s really quite meaningless!

  18. normlspellingerror says:

    A) How much you get approved for is based on unsecured income. B) Interest rate depends on credit score. Trust me. Debt to income, DTI, is only a factor if it is too much. The rest is based upon individual policy of each financial instutions. Of course, shop your nearest credit union vs evil banks. If your financial instution end in bank, you need to switch.

  19. Coelacanth says:

    Given the outrageous fees banks are charging for credit cards to most consumers, personal loans work out to be a pretty good deal.

    Also, since the debt converts between a revolving credit line to an installment loan, one may see their credit score get quite a boost if they’re able to convert most of the debt.

  20. humphrmi says:

    Back in 1978, at age 15, I bought my first PC – a Commodore Pet 2001, which I financed with a sig loan from GECC (General Electric Credit Corporation). Paid it off in 2 years. I’ve always felt that the return of Personal Loans could easily replace scummy payday loans.

    • TouchMyMonkey says:

      That is, if you qualify. People in the ‘hood who work for $8/hr. usually (but not always) have shitty credit. At any rate, they’re considered higher risk than you.

      • humphrmi says:

        Higher risk than me today, sure. But I got that loan at 15. Working at Shakey’s Pizza part time after school. With no established credit (although I had a checking account.)

        Sig loans adjust the amount you’re eligible for based on risk, but almost nobody (well, back when I used them) got turned down for *some* amount. And usually, that amount was what you could afford. I talked to an HFC guy who said someone could walk in his office after leaving bankruptcy court and generally get a $300 sig loan with proof of identity.

  21. TasteyCat says:

    Credit union is the way to go. My local CU offers loans starting at 7.5%. If you have low debt-to-income and good credit, LendingClub (online peer-to-peer loans) may also be worth exploring, with rates below 10%. Ultimately, if you can get the loan, it also prevents you from carrying the balance on your credit cards, so your CC banks don’t get scared about utilization.

  22. gman863 says:

    Here’s a dirty little secret credit card issuers don’t advertise about cash advances. In some cases you can call the card issuer and negoiate a deal far better than the shredder confetti (balance transfer checks) sent out on a regular basis. Here’s how I did it with Citi – twice:

    * Pick an existing card that’s either paid off or has a very low balance you can pay off before accepting any deal the bank offers (you don’t want payments applied to a lower rate cash advance with higher rates on old purchases adding up).

    * Have a good to excellent credit rating, especially on payments made to the bank issuing the credit card.

    * DO NOT use balance transfer checks. Call the card’s “800″ number and ask to speak to a rep about cash advance options. If they quote you the normal (outrageous) rate or a limited time low rate that later jumps, tell them you’re looking at a major project and are comparing the BEST POSSIBLE FIXED RATE (home remodeling, rennovating grandma’s home, etc. are the best “reasons”. Although motorcycles and vacations are on my wish list, property improvements sound more wholesome to a bank’s decision maker).

    * Shut up and listen to their initial offer. About 4 years ago, Citibank hit me with 1.99 APR FIXED RATE on my AT&T card. The 3% balance transfer fee was capped at $75 total on an 8K loan.

    * When I had most of this paid off, I called Citi’s AT&T card back and asked if we could do it again. After the rep’s best offer was 4.99%, I thanked her and said I would think about it. The next day I called the different “800″ # for my other Citi card and repeated the steps. You guessed it: 1.99 APR FIXED with a flat advance fee of $75 on a $13K loan!

    I told the rep I would call back in about two weeks once I had a firm estimate from the contractor and was ready to pay him the deposit (translation: This cash advance doesn’t exisit on paper or in my credit bureau until after I’ve signed the final papers on my new house).

    This $13K at 1.99% will be paid off in 4 more years (7 years total). Compare this to paying the same amount per month (principal, interest and required private mortgage insurance) for 30 years and I saved in excess of $20,000!

    Again, two warnings:

    * Get the fixed rate terms in writing before accepting the money.

    * Set up an autopayment of at least the minimum amount due each month. I wonder if Citi is secretly hoping I’ll miss a payment so they can jack me to a 26.99% default rate. I keep an emergency reserve fund tied to my checking overdraft so this ain’t gonna happen.

  23. Deezul_AwT says:

    I have a Line of Credit loan that I use as my over draft protection on my checking account. It’s at my credit union, and it happens that the LOC is the same interest rate as my credit card, and thus it has an adjustable rate as well. Works good as over draft since I end up paying off the balance with in a day or two of going over. It’s almost always a day or two before payday anyway. Plus, if I need a quick loan, I can transfer it to my debit card. I still have a savings account, and used it as my over draft, but every once iin a while I would get really bad watching my balances and would hit the 6 electronic withdrawels on the savings account. The LOC has been much better for this. And when there’s no balance, I’m not charged any fees, so it just sits there.

  24. MustWarnOthers says:

    So do Banks securitize these types of straightforward personal loans too?

    They don’t seem to be as risky as large mortgages, but why not start betting on them?

  25. MrEvil says:

    My dad took out a title loan on his classic Bronco last year from his credit union. Since the vehicle is a collector vehicle insured for $6000 from Hagerty; the Credit Union had no problem loaning him $4000 for it. My dad just needed a bit of extra liquidity until harvest.

    If you have a regular direct deposit at a CU usually they’re willing to work with you to hammer out a loan if you agree to auto-draft on every payday, without much regard for your credit.

  26. Blueskylaw says:

    “Old-School Personal Loans Make A Comeback”

    I don’t get it, what is the bank’s angle here?

  27. CWG85338 says:

    If you have to borrow to buy it, you don’t need it. We plan to send every offer for credit back to the banks, at their expense, with a little note telling them how they sucked when we needed them, and we don’t need their stinkin’ money…

  28. DeathByCuriosity says:

    My fiscally irresponsible in-laws will be all over these. They spend every penny of their income and then try to take out crazy loans from banks or hit up relatives for money when they face sudden expenses like car repairs (they drive a car that’s made all the Top Ten Worst Cars lists) or doctor bills (one of them has a chronic illness).

    They recently asked us to co-sign on a personal loan, and we said no because we didn’t want to end up footing the bill and getting our credit score dinged just because they couldn’t pay up (and we knew there was a very good chance of that happening), especially since we’re going to buy a home within a year or so.

    It’s a good thing that we refused because when they went back to the bank, there was some sort of bait-and-switch thing and the payments would have been higher than initially quoted. They would have barely made the original quoted payments and they definitely couldn’t have made the higher payments.

    There was a crapload of family drama and they’re still pissed at us, but it was better than the alternative.

  29. HogwartsProfessor says:

    I used to do the Christmas Club thing when I lived in my hometown. Now I don’t have that any more. I don’t think my current bank does that.

    The loan I took out for my vacation to visit my honey when he was in Georgia was through American General. I’ve used them before and had no problems. The interest is about what it would be if I had a credit card. There is no penalty if I pay it off early.

  30. morehalcyondays says:

    I did one of these through my credit union for 7k. The rate was 8.75 for a year, paid it off in 8 months. It went to a new roof, and the roofers gave us $500 off for paying in cash.