Is the Personal Loan Making a Comeback?

Applying for a loanOnce upon a time, if somebody needed money, they didn't turn to a credit card or opt for a home equity loan. And because payday lending stores didn't exist, they didn't go there, either. Instead, for much of the 20th century, if you needed extra money you went to the bank and asked for a loan -- and you often got one.

Then a not-so-funny thing happened: During the 1990s, banks started discovering that home-equity loans were a much more profitable venture for them. So they stopped advertising personal loans, and the public largely stopped asking for them, happy to feed on their diet of the more flexible home-equity loans and credit cards, the use of which rapidly grew throughout the 1990s and 2000s.
Yeah, that worked out well.

Now, much as layaway plans are making a comeback, so too is the personal loan, it seems. According to CBS MoneyWatch, Wells Fargo, Discover Financial, Citi and CapitalOne are all promoting personal loans. Here's what those banks are offering:
  • Wells Fargo will lend individuals $3,000 to $100,000 for as long as five years.
  • Citi will lend its customers $300 to $7,500.
  • Discover Financial will lend up to $25,000.
  • What Capital One will lend varies and is only available to customers who are offered these loans.
We've found plenty of other banks offering personal loans, too, including:

The appeal of a personal loan is that you borrow a specific amount of money for a certain amount of time, then once you've paid it off, it's over, done, finished. No more loan payments, no open account, no yearly fee.

And while it's not cheap, it's probably going to cost you much less than the same amount charged to a credit card. Say, for instance, that you borrow $10,000 from your bank at 5.99% interest. You make monthly payments of $304.17 for the next three years and then you're done.

But borrow that same amount on a credit card, and you're likely to pay a much higher interest rate. And on top of that, odds are even better that, at some point, as you pay down the card, human nature will take over, you'll eye some amazing gadget in a store and you'll whip out your credit card. The $10,000 that had shrunk to $8,000 is now back up to $9,000. And you're going to stay in debt all that much longer.

So is it a good idea to take out a personal loan instead of, say, charging your purchase on a credit card, taking out a home equity loan, taking out a second mortgage or asking your bank for a line of credit? Here's what a few experts had to say.

"This is a terrific idea on paper," says Gail Cunningham, spokesperson for the National Foundation for Credit Counseling. But she cautions that if you already have credit cards, going for a personal loan can be problematic. "The consumer, regardless of how well-meaning he is, will typically run up his charge cards and, at the end of a year, owe the bank and the credit cards. So often, things that work well mathematically [on paper] don't smoothly translate into practice."

Theodore W. Connolly, a bankruptcy lawyer and co-author of the new book, The Road Out of Debt: Bankruptcy and Other Solutions to Your Financial Problems, says, hands down, "Personal loans are a much better choice." Why? "Basically, I see credit cards designed so you don't rush to pay them back, whereas personal loans are designed for the regular repayment."

The only caveat, of course, is that if you're going to take out a personal loan, you'd better have a really good reason to do so. After all, you're about to commit yourself to going into debt for a number of years, so hopefully you can say "yes" to the critical question: Will it be worth it to be in debt for three or four years because of this loan?

Regular readers of my WalletPop posts know that I have a rich history of being cash poor, and about 10 years ago, I took out two personal loans from Wells Fargo within a few months of each other. They were around $1,500 each and designed to be paid off in about three years. When I took out the loans, I knew they were predatory loans aimed at people who didn't mind or didn't care that the interest rate was high. But I was desperate. I accepted them.

As lousy as these loans were, however, they weren't credit cards. I made my monthly payments, struggling some months to do so, and three long years later, the loans were paid off. Compared to many of the alternatives -- and if you truly believe you can make the payments -- I'd have to say taking out a personal loan could work out well for some people. Connolly thinks so, too.

And Cunningham is for it, but only if the borrower is extremely disciplined and not trying to be too clever about how he or she is managing their debt. "Consumers need to remember that moving debt around is not paying debt off," says Cunningham. "So often people think they're being savvy money managers when, in fact, they're not better off this year than last."

Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.
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