Is a per­sonal loan the right so­lu­tion for you?

Daily Local News (West Chester, PA) - - BUSINESS - By Sarah Skid­more Sell

Per­sonal loans have surged in pop­u­lar­ity, due in part to in­creas­ing con­sumer con­fi­dence and a grow­ing ar­ray of on­line lenders to pro­vide them.

Credit re­port­ing agency Ex­pe­rian says that per­sonal loans were the fastest-grow­ing type of con­sumer debt in the past year. Ac­cord­ing to Ex­pe­rian, ex­ist­ing per­sonal loan debt hit $273 mil­lion in the sec­ond quar­ter, up 11 per­cent from the same quar­ter last year. While per­sonal loans re­main a small part of over­all con­sumer debt, that’s a faster in­crease than seen for auto, credit cards, mort­gages and stu­dent loan bor­row­ing.

The ba­sics

A per­sonal loan can be used for any pur­pose, although they are of­ten used to con­sol­i­date debt or make a ma­jor one-time pur­chase. The money is pro­vided in a lump sum and re­paid over a fixed pe­riod of time — typ­i­cally a few years — with equal monthly pay­ments.

Con­sumers like per­sonal loans be­cause they pro­vide an easy so­lu­tion when they need a large sum of cash, such as to pay for braces or a new roof. And for those peo­ple try­ing to dig out from un­der credit card or other re­volv­ing debt, the loan es­tab­lishes an easy means to bud­get with lower in­ter­est rates than credit cards, and with a fin­ish line for re­pay­ment they can look for­ward to.

The ex­act in­ter­est rate some­one pays de­pends on sev­eral fac­tors, in­clud­ing credit score, credit his­tory, monthly cash flow and debt-to-in­come ra­tio. The stronger your credit pro­file and his­tory of fi­nan­cial re­spon­si­bil­ity, the lower the in­ter­est rate you can ex­pect.

The need

Con­sumers are us­ing per-

sonal loans for a va­ri­ety of big pur­chases.

Lend­ing Point, an on­line provider of per­sonal loans, found that its cus­tomers use loans for dif­fer­ent needs based on their age and the time of year. Younger peo­ple, for ex­am­ple,

tend to use loans to pay for wed­dings and mov­ing ex­penses, while older bor­row­ers tend to use the money for med­i­cal ex­penses and home im­prove­ment. Chief Mar­ket­ing Of­fi­cer

Mark Lorimer said this re­flects some of the younger gen­er­a­tion’s leer­i­ness about credit card debt.

But look­ing at all age groups, they fol­low a sea­sonal theme as well — bor­row­ing in De­cem­ber is more than twice as likely to be ear­marked for med­i­cal pro­ce­dures than dur­ing the rest of the year. Loan re­quests in Au­gust tended to be higher for mov­ing and wed­dings, while those in Fe­bru­ary are nearly three times as likely to go to­ward taxes.

The use

So what is the right way to use the loan? Ex­pe­rian’s Pub­lic Ed­u­ca­tion Di­rec­tor Rod Grif­fin said per­sonal loans are best viewed as a short-term loan for one­time use.

While good for big pur­chases, they can also be a smart move if you are strug­gling to pay off mul­ti­ple credit cards. How­ever, con­sider how you got into debt with credit cards in the first place and how to man­age your bud­get mov­ing for­ward. You don’t want take out the loan and run up your cards again, only to find your­self back in the same place later on.

Sim­i­larly, if you are bor­row­ing to gam­ble, sup­port an ad­dic­tion, take a va­ca­tion or bail out a fam­ily mem­ber or friend in need, you may be in a worse sit­u­a­tion down the road, said Bruce McClary, spokesman for the Na­tional Foun­da­tion for Con­sumer Credit Coun­sel­ing.

You can get a per­sonal loan through a bank, credit union or other lender. It pays to shop around and find the best terms. Never sign a loan con­tract with­out hav­ing a com­plete un­der­stand­ing of all of the de­tails, McClary ad­vises. By law, the lender must dis­close the in­ter­est rate and all as­so­ci­ated costs of re­pay­ment be­fore you sign any­thing.

If you think you may need to bor­row more later on, con­sider other types of bor­row­ing such as a per­sonal line of credit or us­ing your credit card.

“Over­all, con­sumers should re­mem­ber — credit is a tool to be used wisely,” Grif­fin said. “A per­sonal loan should be taken be­cause of ne­ces­sity with a plan in place to pay it back quickly and on-time to keep you debt-free and to main­tain a good credit score in the fu­ture.”

While good for big pur­chases, they can also be a smart move if you are strug­gling to pay off mul­ti­ple credit cards. How­ever, con­sider how you got into debt with credit cards in the first place and how to man­age your bud­get mov­ing for­ward.

ELISE AMENDOLA — THE AS­SO­CI­ATED PRESS FILE PHOTO

In this June 15 photo, $20 bills are counted in North Andover, Mass. Per­sonal loans are en­joy­ing a surge in pop­u­lar­ity, due in part to in­creas­ing con­sumer con­fi­dence and a grow­ing ar­ray of on­line lenders to pro­vide them. Credit re­port­ing agency Ex­pe­rian said last month that per­sonal loans were the fastest-grow­ing type of con­sumer debt in the past year.

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