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Secured vs. Unsecured Personal Loans: Understanding the Difference

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At one point or another, most people will need to borrow money for a large expense such as college tuition, purchasing or remodeling a home, or buying a vehicle. Although it’s possible to save up enough cash to pay for these big expenses, many choose to finance their purchase and pay it back over a period of time using either a secured or an unsecured personal loan.

Unfortunately, it’s not always easy to determine which type of debt is best for your unique financial situation. For new borrowers, the differences between the two can be confusing. What’s required of a borrower when they take out a secure or an unsecured loan? When might it make sense to use one versus the other?

Secured vs. unsecured personal loans

Secured loans and unsecured loans have several differences, but the most important to remember is that secured loans are literally “secured” against items owned by the person needing the loan, while unsecured loans are not. This collateral could be anything that holds equity and is owned by the borrower.

For example, you might use your car, boat, home or property you own as collateral on a secured loan. Unsecured loans, on the other hand, only look at a borrower’s ability to repay their loan based on their income, current debts and credit score.

However, this isn’t the only way that these two loan types differ. Let’s do a side-by-side comparison to get a better idea of what each of these loans requires from borrowers, and how they work.

 Secured personal loans Unsecured personal loans

Credit check needed?

Sometimes. Secured loans don’t have as strict credit requirements because the lender is already using something of monetary value to secure the loan. So, if you don’t have fantastic credit, but you own a car, lenders may be more lenient.

Yes. Unsecured loans don’t use any collateral to secure the loan. Typically, lenders require a credit check to ascertain your ability to repay the loan.

Typical interest rates

Interest rates will vary on secured loans, but are often relatively low – around 5%. However, some secured loans (like title or payday loans) have much higher interest rates associated with them (often hitting, or exceeding, double digits).

APRs start as low as 3.49%. This large range in interest rates is dependent on the type of loan (for example, interest rates for federal student loans are lower than personal loans or lines of credit), down payment made by the borrower and ability for the borrower to pay off the loan (judged by their credit score).

Examples

  • Secured credit card

  • Mortgage

  • Auto loan

  • HEL/HELOC (for home repairs and improvements)

  • Payday loan

  • Title loan


  • Personal loan

  • Business loan

  • Student loan

  • Credit card



Collateral required?

Yes. The collateral provided by the borrower “secures” the loan.

No. Unsecured loans are based entirely on your credit history and ability to repay the loan.

Best for?

Secured loans can help you to complete expensive and necessary purchases if you have poor credit history. However, some secured loans (like payday loans) are predatory in nature, and have high interest rates that could further hurt your credit if you’re unable to repay them.

Borrowers who have good credit and the ability to pay back their loan on a purchase.

What are secured personal loans?

Secured personal loans are offered by a wide range of lenders, and are intended to help borrowers who may or may not have a solid credit history make necessary big-ticket purchases or rebuild their credit.
This debt works in a relatively straightforward way. A borrower applies for a secured personal loan through a bank, credit union or a nonbank lender. The lender then assesses what the borrower has to offer as collateral for the loan. Based on the value of the borrower’s collateral, the lender will approve them to borrow a set amount of money. However, if the borrower fails to keep up with payments on their secured personal loan, the lender is permitted to repossess the borrower’s collateral at any point in time.

For example, if you take out a secured personal loan to pay for a home renovation using the car you own as collateral, your lender can come and take possession of your car if you fail to make payments. If you’re a borrower who can be counted on to make payments on time and to pay the loan off in full within the set time frame, this may not be intimidating.

However, many people seek out secured loans because their credit score alone isn’t enough to obtain an unsecured personal loan from a lender. This might be through no fault of their own, or it could mean they have had trouble repaying their debt in the past for a wide range of reasons. Be cautious when offering collateral for your secured personal loan, and make sure that you’ll be able to afford the loan’s repayment terms (including interest).

One of the benefits of a secured personal loan is that it can be used for nearly anything. Many people, for example, use the equity they already have in their home to finance a home repair loan (HELOC). Others use secured loans to finance vehicle purchases or to fund the launch of a business.

Regardless of what you’re using your secured personal loan for, it’s important to read through your loan terms carefully. Secured personal loans are notorious for being charging high interest rates and can sometimes have predatory rates or practices.

If you’re pursuing a secured personal loan, keep a few things in mind:

  • Whatever you choose to put up for collateral for your loan can be taken by your lender if you fail to make payments.
  • You may be able to get a lower interest rate with a secured personal loan because the lender is taking on less risk when you offer up collateral.
  • Some secured personal loans are predatory, and they come with hefty fees and high interest rates – make sure to shop around and do your research before signing on the dotted line.

What are unsecured personal loans?

Unsecured personal loans are different. They don’t require any collateral from the borrower. However, because there’s nothing to “secure” them, or to protect the lender should you default on payments, they tend to be harder to obtain.

Unsecured personal loans usually require a credit check, and the interest rates associated with the loan are largely dependent on whether or not you have decent credit. If the lender feels they can trust you to repay the loan based on your current finances and you have a history of paying back your debt on time and in full, you may qualify for a lower interest rate. However, if you don’t have a good history of repaying your debt, or you don’t have income available that would support the loan repayment, you could get stuck with a higher interest rate.

That being said, unsecured personal loans certainly serve a purpose. Student loans, for example, are a form of unsecured personal loans. They require no down payment or collateral, often have reasonable interest rates and help students to fund their education. A variety of lenders including banks, credit unions and nonbank lenders (typically found online) offer unsecured personal loans.

It can be frustrating for borrowers to try and obtain an unsecured loan because restrictions (like a minimum credit score, a high income or a cosigner) are often more strict than those associated with secured personal loans. It can be helpful to keep in mind that for a lender, an unsecured loan is a notably higher risk than a secured personal loan. Essentially, they’re taking a chance on the fact that you’ll pay the loan back in full with interest, and have no real way of knowing for sure that you’ll be able to do so. This is also why interest rates for unsecured personal loans are significantly higher than those you can find with secured personal loans.

If you’re pursuing an unsecured personal loan, you should keep a few things in mind:

  • You’ll need to budget for potentially higher monthly payments than a secured loan.
  • You will need to have good credit to obtain an unsecured personal loan.
  • You may not qualify for the loan unless you have a cosigner who can help lessen the amount of risk a lender takes on by lending to you.

If you’re unsure about where to find a personal loan, you can see offers from LendingTree. With it, you’ll input basic personal information and what you’re looking for out of a loan. If you qualify, you’ll get to review personal loan offers from various lenders.

Should you get a secured or unsecured personal loan?

The actual question on most borrowers’ minds is: Which loan is right for me? The truth is, both secured and unsecured personal loans pose some risk for you as a borrower. However, there are several things to take into consideration when deciding which is best for you.

Ability to repay

Consider everything that could impact your ability to repay this loan. Is your job secure? Do you have upcoming expenses that will tighten your budget? If you’re concerned about repayment, putting up something you own that’s necessary for day-to-day survival (like a home or a vehicle) for a secured personal loan may not be in your best interest. Of course, if you’re worried about your ability to repay a loan, there’s a good chance that you should reconsider the loan amount – or whether you should apply at all.

Total interest and fees

Although unsecured loans often have higher interest rates, secured loans may have notable hidden fees if they’re predatory, like a payday loan. Weigh your ability to repay loans each month, taking note of the interest amounts. It usually serves borrowers to shop around before committing, and that may mean looking at both unsecured and secured loans to determine what works best for you.

Future financial goals

Do you plan to pay this loan off quickly? Do you have other financial goals in the near or distant future that this loan could impact? If you want to pay a loan off quickly and are confident in your ability to repay, locking in low interest rates with a secured loan might make the most sense.

Worst-case scenario planning

It always helps to consider the worst-case scenario when applying for a loan. If you fail to repay your loan, what’s going to happen? Whether you apply for a secured or unsecured loan, your credit will take a hit.

If you have a secured loan, you could potentially lose your house, your car or other assets you’ve put up as collateral for the loan. You may also need to take out another loan to cover this debt and end up in a vicious debt cycle. If you can afford to lose what you’ve put up as collateral, this may not be the end of the world. However, if you can’t – it’s likely not worth the risk.

Final thoughts

Applying for a loan can be challenging, but it’s important to know that you have options available to you. Researching the difference between secured and unsecured loans can help you determine which is best for you based on what you can afford, and which loan type fits best into your long-term financial plans. Your relationships with some financial institutions could also positively impact the loan terms you receive.

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As of 17-May-19, LendingTree Personal Loan consumers were seeing match rates as low as 3.49% (3.49% APR) on a $10,000 loan amount for a term of three (3) years. Rates and APRs were based on a self-identified credit score of 700 or higher, zero down payment, origination fees of $0 to $100 (depending on loan amount and term selected).

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The Ultimate Guide to Personal Loans

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Personal loans are a versatile form of credit. You can use them to consolidate other high-interest debts, pay for home improvements and more. Because they usually come with fixed interest rates and repayment schedules, you know exactly how much you need to pay each month and when your debt will be paid in full.

Still, taking on any type of debt is a serious responsibility. This personal loan guide will help you learn more about how personal loans work, which pitfalls to avoid and some alternatives to consider.

Part I: Personal Loans 101

How do personal loans work?

When you apply for a personal loan, you borrow a specific amount of money — most often at a fixed interest rate — for a set amount of time. Then you pay off your balance monthly until it’s paid in full.

The terms of your personal loan will depend on your unique financial situation and your lender. The loans are typically offered in amounts ranging from $1,000 to $50,000, and potentially even higher, depending on the lender. As for the repayment period, the loans’ terms often range from one to five years, but can potentially go up to 15 years for purposes such as home improvement.

Personal loans are unsecured debt, meaning they’re not secured by an underlying investment like a home or a car. For that reason, they usually come with higher interest rates than you might get with a mortgage or auto loan.

To get a real sense of how much a personal loan will cost you, keep an eye on the annual percentage rate, or APR. It includes interest and other costs, which could include an origination fee. An origination fee is a loan processing fee that can typically be 1% to 8% of the loan amount; however, some lenders, such as Lightstream and Discover, don’t charge any origination fees at all.

Pros and cons of personal loans

Pros

  • Interest rates can be lower than credit cards. While interest rates on personal loan offers have risen lately, they can still be a good option for consolidating high-interest credit card debt, especially if your credit is top-notch. The average APR on a personal loan offer from a lender is now 11.81% for borrowers with excellent credit, and 15.61% for those with very good credit, according to recent data from parent site LendingTree; in contrast, companion site CompareCards lists the average APR on all credit accounts is 15.09%.
  • Quick access to funds. Depending on your lender, you may receive funding for a personal loan in just a day or two.
  • Predictable payments and interest. Because personal loans generally come with fixed rates and payment terms, you may not have to worry about your interest rate or monthly payment going up. That makes it easier to budget.

Cons

  • Could lead to overspending. Personal loans can be used for almost any purpose, which could lead you to borrow more than you can afford to repay each month.
  • Higher interest rates than some loan products. For example, if you have equity in your home and good credit, you may be able to get a better rate with a home equity loan or line of credit.
  • Damage to your credit if you don’t pay. Some lenders offer options for borrowers facing financial difficulties, and may work with you if you lose your job or face other financial troubles. However, your credit might be damaged if you ultimately can’t make your payments.

What you may need to qualify for a personal loan

  • Good or excellent credit. If your credit score is 640 or lower, it will likely be more difficult to get approval for a personal loan (although some personal loan companies might still work with you). By contrast, having good credit (a FICO score of at least 670) will give you more borrowing options, and a score of 740 will let you qualify for loans with the best interest rates and terms.
  • Low debt-to-income ratio. Lenders might be hesitant to lend money if your debt-to-income ratio is too high. This ratio is determined by taking your total monthly recurring debt and dividing it by your gross monthly income. For personal loans, lenders usually like to see a DTI ratio of 36% or less. Still, even with a high DTI, you may qualify for a personal loan if your credit score meets a lender’s criteria, and you have both a solid income and credit repayment history.
  • Cosigner or collateral. If you have a bad credit score, you may need a cosigner with good credit or collateral to help you qualify for a personal loan.

How to pick the best personal loan

Here are tips that can help you identify a personal loan that’s right for you:

  • Shop around with different lenders. Gather information on personal loans to compare interest rates and loan terms from various lenders.
  • Read the fine print. Make sure you understand your contract, your monthly payment and all terms and potential fees.
  • Read reviews. Reading reviews of top personal loan companies can help you gauge the quality of each lender and what your experience might be like.

Part II: Common Uses for a Personal Loan

You might be surprised to know just how many uses personal loans can have. According to an April 2020 report from LendingTree, some of the top reasons applicants seek personal loans include:

  • Credit card refinance: 32.0%
  • Debt consolidation: 31.0%
  • Home improvement: 8.5%
  • Major purchases: 5.0%
  • Car financing: 4.3%
  • Business: 1.8%

These numbers don’t mean personal loans are the right choice in every borrowing situation. Here’s some more information about potential uses, along with some pros and cons:

Common uses for personal loans

Debt consolidation

If you’re struggling to pay back several types of debt, a personal loan may let you streamline payments and pay less interest overall. One caveat: if you can qualify for one, a 0% balance transfer credit card could be a less expensive option for combining debt.

Credit card refinance

Personal loans often have lower interest rates than credit cards — just make sure you’ll actually save money after taking into account a loan’s interest rate, origination fee and repayment term.

Home improvement

If you don’t have enough equity in your home to qualify for a home equity loan or line of credit, a personal loan can help finance home improvements. It may, however, come with a higher interest rate.

Major purchase

A personal loan might cost less in interest than a credit card for that big buy of yours. Still, before taking on new debt, consider whether you really need that purchase now — or whether it would be cheaper to save up and pay cash.

Car financing

A personal loan could be an option for buying a car, but it might be easier to qualify for an auto loan, as well as pay less interest and fewer fees (a car loan uses the vehicle as collateral).

Small business financing

If you’re starting a business and aren’t yet earning money, it may be tough to qualify for a business loan. A personal loan can help get your business off the ground. One potential red flag: If your business goes under, you’ll still have to pay back the loan or risk damaging your credit.

Medical expenses

Taking out a personal loan to pay for medical expenses can keep medical bills from going to a collection agency. However, first see if your medical provider provides payment help, as many do. They may be willing to work with you to pay off your balance — and not charge interest.

Part III: Personal Loan Traps and Scams to Avoid

Here are some personal loan traps you should consider:

Advance loan fees

Occasionally, a fraudulent loan company will offer outrageous loans and loan terms with a catch: You must pay upfront fees or “insurance” to qualify.

Look out for lenders who ask you to wire funds via Western Union or MoneyGram — reputable lenders won’t ask you to pay money upfront.

‘No credit check’ loans

According to the Federal Trade Commission (FTC), a lender who isn’t interested in checking your credit is a red flag.

Steer clear of ads and websites that promise “Bad credit? No problem” or “We don’t care about your past,” the FTC cautions. These slogans usually signal a scam.

Precomputed interest

Some personal loans might come with precomputed interest, which means they use the original payment schedule to calculate interest, even if you make payments early. This forces you to pay more interest over time, even if you make larger payments or try to pay off your loan early.

Prepayment penalties

Some personal loans tack on a prepayment penalty if you pay your loan off early. And while prepayment penalties aren’t that common, they are unnecessary. Be sure to read through your loan terms to check for a prepayment penalty before you sign the agreement. If you find one, consider opting for another lender.

Part IV: Alternatives to a Personal Loan

Personal loans vs. credit cards

Credit cards can be a great deal if you pay them off monthly, as you have the potential to earn rewards.

Personal loans vs. HELOCs

A home equity line of credit (HELOC) is a revolving line of credit secured by your home. HELOCs often have lower interest rates than personal loans, and you may be able to deduct the interest if you itemize your taxes. By contrast, interest paid on your personal loan is not tax-deductible.

Personal loans vs. cash-out refinance

A cash-out refinance lets you take out a new mortgage that’s more than what you now owe, and pocket a portion of the loan as cash. It usually comes with a lower interest rate than a personal loan, but with longer terms, so you could end up paying more overall. If you’re opting for a cash-out refinance, check this calculator to determine how much you might be able to borrow, and what your new monthly mortgage payment will be.

Unsecured personal loans vs. secured personal loans

A secured personal loan requires borrowers to use an asset, like a vehicle or certificate of deposit (CD), as collateral. A lender can repossess the asset if the borrower fails to make payments, so interest rates on secured personal loans tend to be lower than those on unsecured loans.

FAQ: Personal loans

The amount you can borrow varies by lender, but generally ranges from $1,000 to $50,000.

Yes, if you use it to consolidate high-interest debts from credit cards or other loans. To get out of debt faster, make sure your new personal loan comes with a lower interest rate than you’re already paying, along with few or no fees.

Your interest rate depends on the type of loan you apply for, how much you want to borrow and the quality of your credit. While each lender is different — for example, some will work with you if your credit isn’t ideal — a FICO score of at least 670 will give you more options.

If you were denied a personal loan due to poor credit, the best thing you can do is work on improving your credit rating. Pay bills on time, pay off debt to reduce the amount of available credit you’re using and avoid opening or closing too many accounts.

Thanks to the internet, you can apply for a personal loan online and from the comfort of your home. You can also compare fees and interest rates from top personal loan companies by visiting this page.

If you apply for a personal loan, a hard inquiry will be placed on your credit report, but any negative hit your score takes will be short-lived. Your credit score will more likely take a larger hit if you borrow too much and can’t repay. On the other hand, repaying your personal loan on time, and ultimately in full, might actually help your score in the long run.

If you’re cash-strapped, this may sound tempting, but most mortgage lenders discourage it. Before approving you for a mortgage, lenders will look at your debt-to-income ratio, so taking on a personal loan to afford a down payment might actually disqualify you in the end.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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What Is Predatory Lending? What You Need to Know

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Predatory lending occurs when a borrower is pushed (or tricked) into getting a loan with terms that are unclear or deliberately deceptive.

If you’ve ever felt pressured to take a loan where the terms weren’t what you expected, most likely you’ve had a brush with predatory lending. Maybe you also felt harassed — or even threatened — into signing a loan without fully understanding the terms, or before you were ready.

Any lender can engage in predatory lending, whether it’s for a mortgage, car purchase, home improvement loan or a similar borrowing situation. Here’s a guide to what you need to know about predatory lending: common warning signs, ways to fight back and some of the lending alternatives you might want to consider instead.

How does predatory lending work?

With a predatory loan, the loan is most often not what the lender initially described. For example, maybe you were promised a fixed-rate mortgage, as well as a long repayment term, for that new home. Instead, you’re handed an adjustable-rate mortgage — with a very short repayment term that makes it almost impossible to pay back without an expensive refinance that your lender offers to do too. If that happens, you’ve been subjected to a classic bait-and-switch move in predatory lending.

Some borrowers are especially vulnerable to this type of deceit. Elderly borrowers, for example, may have a lot of equity in their homes, but limited access to income or credit. Predatory lenders also prey on borrowers who need emergency cash to pay for unexpected medical bills, or home or auto repairs.

Taking out a payday loan often causes problems too. You might get your money quickly and with little fuss, perhaps at a storefront or online, but those loans almost always carry exorbitantly high interest rates.

Coronavirus: Beware predatory lending practices

In times of crisis, certain lenders may decide to take advantage of consumers who might be experiencing dire financial circumstances. The economic uncertainty caused by the new coronavirus pandemic is no exception, and U.S. lawmakers have already expressed concern about how financially vulnerable Americans may be as they face salary cuts, job losses and the prospect of an imminent recession.

If the pandemic has left you facing financial hardship, avoid using predatory loans to stay afloat. Instead, you may be able to access needed funds — as well as deferments on loan payments, like those that may be available for mortgages — from your bank or credit union. You might also be eligible for an Economic Impact Payment and other resources provided by the federal 2020 CARES Act. To learn more about this major piece of legislation, check this link from our parent company LendingTree.

Predatory lending practices: 8 warning signs

High interest rates and fees

High interest rates and fees are key signs of a predatory loan. If you’re applying for a loan and the interest rate or the loan and documentation fees seem high, ask your broker if they’ll be getting a yield-spread premium from the lender. This is a commission your lender may be paying the broker in exchange for offering an inflated interest rate.

Lack of information

If loan terms aren’t clear to you — or a lender can’t answer your borrowing questions directly — there’s a good chance you’re dealing with a predatory lender. Avoid signing on the dotted line if a lender can’t clearly tell you whether your interest rate (or any other terms) will change over the course of the loan, what fees will be included or if there are prepayment penalties.

False information

Predatory lenders often misrepresent loan terms or may even lie about them. Beware of loan terms that seem too good to be true; they most likely are. Language like “easy payment terms, “no payments for 90 days” or “easy credit” should raise red flags.

Pledges not to perform credit check

Lenders routinely perform credit checks before approving and issuing loans to ensure the borrower can afford to repay. If a lender tells you “no credit check required,” chances are that lender is going to require some form of collateral, possibly in the form of the title to your car or access to a bank account. It’s never a good idea to put other assets at risk for a loan you might not even be able to repay.

Unusual prepayment penalties

When you take out a loan, you generally have the option of either repaying the loan early or refinancing, usually without paying any penalties, or at least with very limited fees. A predatory loan, however, may include steep fees for prepayment and refinancing, and these fees can add up to thousands of dollars.

Doesn’t report to credit bureaus

One of the advantages of taking out any kind of loan is that it can help you build a solid credit history, assuming you make payments on time and your lender reports the loan to credit bureaus. Lenders are not legally required to report loans to bureaus — however, if your loan isn’t reported, it might be a sign your lender doesn’t necessarily have your best financial interests in mind.

Lender access to bank account required

Payday lenders, in particular, are likely to ask for bank account information before handing over a high-interest, short-term loan. If you allow access — and are economically vulnerable — you may get hit with overdraft charges if sufficient funds aren’t available to cover the loan.

Hidden balloon payments

Often, a predatory lender may convince a borrower their loan comes with low monthly payments. The borrower later learns those low rates applied only for a short period of time, and that they will “balloon” at the end of the life of the loan unless the borrower doesn’t refinance. If you’re constantly feeling pressured to refinance your loan, persistent “flipping” may be costing you plenty in unnecessary fees and points.

Anti-predatory lending: What are the protections?

Fortunately, there are legal protections in place to reduce the practice of predatory lending and help consumers fight back. Here are some of the laws that provide support and resources:

  • Equal Credit Opportunity Act (ECOA): This law protects consumers from lending discrimination due to age, gender, race or ethnicity. This law aims to rectify the denial of lending opportunities to minority borrowers, who may have encountered predatory lendering because of discrimination by more traditional lending institutions. If you think you’ve been discriminated against, report it to your state attorney general’s office.
  • Truth in Lending Act (TILA): This legislation requires lenders to clearly, accurately and fairly disclose credit and loan terms to borrowers. It also gives borrowers three days to back out of a potential loan without having to pay a financial penalty.
  • Home Ownership and Equity Protection Act (HOEPA): Lawmakers passed this law in 1994 with the specific goal of protecting borrowers from abusive home lending practices and high-cost mortgages, and further amended it in the years following its enactment. For borrowers getting high-cost mortgages, the act directs lenders to provide them with all necessary disclosures and loan terms, and encourages or requires homeownership counseling.

Most states also have laws designed to protect borrowers from predatory lending. These laws range from those that prevent payday loan companies from operating within the states, to caps on the interest rates the companies can charge. Illinois, for example, limits the interest rate that can be charged on payday loans to 15.5%.

To find more about what’s allowed in your state, visit this site from the National Conference of State Legislatures.

Alternatives to predatory lending

Some credit unions offer payday alternative loans, or PALs, to account holders with poor credit who need a short-term loan. A PAL usually offers more financial stability and less risk than a payday loan; for example, you can pay it back over a period of up to six months. PALs are regulated by the National Credit Union Administration, a federal agency. In order to apply for a PAL, you’ll need to belong to a federal credit union.

If you’re in a tight financial spot, you may be able to receive a payroll advance where you work. Many employers let employees borrow against upcoming paychecks to cover a critical, unexpected expense. In general, you can expect a payroll advance to be far less expensive what a payday loan might cost.

If you have either poor credit or no credit, you can still get a personal loan while steering clear of predatory lending practices. Credit unions, in particular, can be solid sources of personal loans for members who have poor credit, and even traditional lenders may be willing to provide a personal loan to someone with bad credit who also has a cosigner.

A credit card is basically a revolving line of credit you can use to borrow up to the credit limit set by the lender, depending on how much credit you have available and as long as you meet the required monthly minimum payments. Pick a credit card with the lowest interest rate you can get, or take advantage of the introductory 0% interest rates many lenders offer. Then, pay off your credit debt as quickly as possible.

It may feel awkward asking family or friends for a loan, but it may give you more flexible repayment terms. The biggest drawback: If you fail to pay back the loan or make timely payments, your relationship may suffer.

Low-income borrowers who want to avoid predatory lenders can contact the National Foundation for Credit Counseling (NFCC) for help with debt management, and to find a reputable nonprofit financial counselor within the foundation’s national network.

If you’re having trouble meeting financial obligations, tap your lender for potential options. For example, a credit card company might be willing to offer a lower monthly minimum payment or a lower interest rate.

FAQ: Predatory lending

Predatory lending occurs when lenders push (or trick) a borrower into getting a loan with terms that are unclear or deliberately deceptive. With any loan you should always feel comfortable with the terms, and the working relationship you have with your lender. If you don’t, it might be time to step back.

Balloon-type mortgages can be predatory if a lender misrepresents or doesn’t ensure a borrower understands payments will escalate over time. The Federal Trade Commission warns consumers to avoid car title loans, as they’re typically short-term loans that come with a triple-digit annual percentage rate (APR). Because the loans require borrowers to hand over the title to their automobile as collateral, you risk losing a much-needed possession.

Predatory student loans often feature excessively high interest rates. The current interest rate on a federal student loan ranges between 4.32% and 7.08%, so be careful if you spot a much higher rate. Student loans that have prepayment penalties or require a car or home as collateral might also be considered predatory.

Be on the lookout for automobile dealers who load up a loan with extra “junk” fees, like for service contracts, rustproofing and theft deterrents. Also look for loans that dealers finance in-house; they may come with an APR that’s far higher than what a bank or credit union might offer.

To get out of a predatory loan, try refinancing the loan with a reputable lender. Credit counselors, often working for free, may be able to help too; you could start by contacting the nonprofit Legal Services Corporation, or HUD, if you need housing help. In addition, the aforementioned NFCC says it will work with clients regardless of their financial situation; according to the organization’s website, “we don’t turn anyone away.”

If you think you’ve been a victim of predatory lending, report it to the Federal Trade Commission or to your state attorney general’s office. If the predatory lending involves a local home improvement contractor, contact the Better Business Bureau for guidance.

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