According to research conducted by the University of New Hampshire’s Carsey School of Public Policy, in 39 states, the number of jobs lost between February and July exceeds those lost in the great recession. While talks about a second stimulus package resume in September, unemployment and income uncertainty are putting a strain on American’s ability to cover large expenses.
Despite this, a growing number of people are relieving financial anxiety by taking out personal loans.
These loans can help you pay bills and cover expenses during cash-strapped times. How hard or easy is it to get a personal loan, and what role has the pandemic played? First, we have to talk about how personal loans work and what you need to consider before applying.
Things to consider when getting a personal loan during COVID-19
There’s an array of personal loans out there, but for the moment, we’re going to focus on the most common one: unsecured personal loans, which don’t require collateral, like a house or car. These loans are offered by banks, credit unions and other lending institutions. They’re paid back in installments and typically come with a fixed interest rate.
“When you compare personal and business loans, you’ll see that the requirements are much less involved for personal loans,” says Nishank Khanna, Chief Marketing Officer for Clarify Capital.
A low interest rate that is relatively easy to obtain sounds great, but there are some things to consider.
Whether the timing is right
Uncertainty surrounding the future during the pandemic has caused banks and other lenders to be more cautious.
“In some cases, getting a personal loan might actually be more difficult during the pandemic, as furloughs and unemployment have increased,” adds Khanna. “Not having proof of income or proof of employment and a change in debt-to-income ratio could negatively affect a borrower’s personal loan eligibility.”
Another thing to keep in mind is your credit score. Since collateral isn’t needed for unsecured personal loans, lenders will put extra emphasis on an individual’s credit score when deciding.
The type of loan you’re looking for
Unsecured personal loans aren’t your only option. Unconventional personal loans are an alternative for those with lower credit scores. These loans are typically managed by nontraditional lenders, such as marketplace lenders, who use a broader range of data to make a decision. Be mindful of the interest rate for these types of loans, especially if your credit score is low and you’re struggling financially.
If taking out a personal loan doesn’t seem like the right fit for you, consider these alternatives.
- Refinancing: If you own a home, you could take advantage of low interest rates by refinancing. A cash-out refinance has the potential to lower your mortgage interest rate while supplying you with money to pay down debt.
- A home equity loan or home equity line of credit: The difference here is really when the money is delivered. With the former, funds are distributed in one lump sum, whereas with the latter, you take money out when you need it.
There is another type of loan option available that you should explore with caution: personal payday loans.
“Your very last do-or-die option for quick cash is a personal payday loan, but approach this with extreme distrust, as these loans are treacherous,” says Jim Pendergast, Senior Vice President of altLINE. “The interest rates on payday loans are notoriously harsh, and if you don’t pay back quickly, you get sucked into an unforgiving debt spiral.”
Current interest rates and the competition
In addition to impacting whether you get approved for a loan, your credit score can also influence the interest rate you’ll be given. As of June, the average interest rate for a 24-month personal loan was 9.63%, according to the Federal Bank’s most recent data.
The interest rate you’ll end up with may vary depending on your lender and where you live. It’s a good idea to shop around and get quotes from different institutions. Often, banks will do a “soft pull” of your credit history, which won’t impact your credit score. You can use an online calculator if you want to play around with numbers to see what payments would look like with different interest rates.
Other forms of financing
There are even more ways to get financial help if you’re in need. If you’re comfortable with the idea, consider asking friends or family for a loan.
You may also look to credit cards, but be cautious.
“In a pinch, consider using a 0% APR or balance transfer credit card to get by,” said Greg Johnson, Co-founder of Club Thrifty, a financial wellness website. “These cards typically offer a 0% APR for a year or more, which could help provide some breathing room.”
Are coronavirus hardship loans easier to get?
If the amount you need is small — $5,000 or less — then a coronavirus hardship loan might be right for you. These loans offer flexibility in terms of repayment schedules and come with low interest rates for those with good credit. The criteria for getting a hardship loan are similar to those of a personal loan so you’ll need a good credit score to get a lower interest rate.
About 80 percent of credit unions are offering this product, according to the Credit Union National Association (CUNA). Other banks are adjusting their loan services by lowering lending amounts to include favorable terms for borrowers.
So some lenders are more willing to issue a loan to someone with a less-than-perfect credit history. Keep in mind these loans can only be used for very specific things, like making a car or mortgage payment. Also, you’ll need to provide proof that the pandemic has negatively impacted your finances when you apply.
Too long, didn’t read?
The pandemic has upended the financial lives of many Americans. Banks and other lenders offer personal loans to help those in need. These loans typically don’t require collateral and come with lower interest rates for those with good credit. There are also other options if you need money to pay bills, such as a home equity loan, a 0% APR (for a limited time) credit card and a coronavirus hardship loan.
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