Banks and credit unions are the most common sources of personal loans. Both have positives and negatives, and it’s up to the borrower to decide which option is best. It’s important to know the difference between a bank and a credit union. Both banks and credit unions are publicly chartered, regulated institutions. Banks are for-profit businesses and credit unions aren’t. Shareholders own banks, but credit unions are owned by members, which credit unions call their account holders.
Although banks have been a more accessible borrowing option in the past because of the large pools of capital they manage, credit unions are growing in popularity. Recently credit unions have become competitive with banks, offering lower fees and higher levels of service. In addition, membership in credit unions has become much less restrictive, making them available to a larger and more diverse population.
Personal loans can be useful, but only if borrowers understand how they work and follow the rules for paying them back. When considering a personal loan, borrowers should consider the amount of interest they’ll pay and any difficulties they anticipate making payments. If your job is in jeopardy, it might not be a good time to take out a loan that requires uninterrupted payments.
Personal Loan Scams
If you have limited financial experience, or are a trusting soul, you could be a target for scam artists. Scam artists take advantage of the most vulnerable members of society, stealing millions of dollars every year from unsuspecting people who thought they were getting a good deal on a personal loan.
If you aren’t experienced at borrowing money, be cautious at all times, whether you’re talking to a lending institution down the street or an online lender offering you a deal that seems too good to be true. It probably is.
Here are things to watch for when you go looking for a personal loan, especially if you’re responding to an advertisement or to an online lender.
- Advance payment fees. The lender will ask for a fee to review or process your loan. They may refer to it as an application fee, document fee or even an insurance fee, but legitimate lenders don’t ask for money in advance of giving you a loan. They disclose all fees and usually roll them into the cost of the loan.
- Wire transfers. If the lender tells you to wire money for the fees he proposes, that is a problem. Verify the business name and a physical address for the lender to be sure it’s a legitimate business. Never wire money to an individual.
- Guaranteed loan. There are some lenders who will call or send invitations to apply for a personal loan with a “guarantee” that you will be approved. Ignore them. The guarantees can’t happen until your credit score and financial situation have been evaluated.
- Interest rate inflation. The interest rate for nearly every loan is determined by some combination of credit score, amount borrowed and repayment schedule. Inflating the interest rate by just a point and stretching the repayment schedule a few years can be very costly to borrowers.
- Companies with copycat name. It is common, especially online, for scam artists to create a company name that sounds and looks familiar, but is a fraud. It is crucial to verify the business name and address before signing on with a company.
- Personal information requests. Be careful not to give your date of birth, social security number, checking account number or any other important personal information unless you’re positive you’re dealing with a legitimate lender. Otherwise, you open yourself up to things like identity theft or having money stolen from your bank account.