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Unsecured loans are not a new phenomenon in the lending world, but are finally falling into favor as a good option for borrowers. As the economy has grown worse over the last couple of years, nowhere has the fallout been more evident than in the world of lending. If you were to travel backwards in time to three years ago, you would see an environment ripe with options, with new, creative ways to lend money popping up almost daily. However, those days are long gone.
Because of the fact that that unsecured personal loans have no collateral to back them up, it is much harder for a lender to recoup their money should the borrower stop making payments, as there is nothing for the lender to go after. As a result of this fact, most unsecured loans had approval guidelines that were much stricter than other lending options. The loans were either offered to tier one borrowers only, with credit scores above 750, or the interest rates were astronomically high. In this golden age of lending, rarely was an unsecured loan the right choice for a borrower.
However, in today’s lending market, lots of viable options are simply no longer there. Credit card guidelines have hurt the credit card industry, resulting in higher interest rates and lower credit limits. Due to the housing crisis, home equity lines are next to impossible to obtain. The banks offering partially secured loans were, for the most part, the same banks offering sub-prime mortgage loans, and are now all gone. So what is left?
You still have the option of pulling cash from the equity in your home. However, unlike the olden days, this is rarely able to be accomplished through a home equity loan. Now, in order to pull cash out, nine times out of ten, you will need to refinance fully your current mortgage. In some instances, this may make sense, but if you have a short term need for the money, it makes no sense to attach this to your home and pay on it for the next thirty years.
If you need money, and your repayment goals are under five years, the only options you have left are unsecured loans. When your alternatives are to either eat up the dwindling equity in your home, pull from a 20% interest rate credit card, or not get the money at all, all of the sudden a 12% unsecured loan doesn’t seem so bad.
When personal debt starts to become unmanageable, unsecured loans are great ways to get things back on track. Whether it is from credit cards, installment loans, or payment plans, an unsecured personal loan can help to bring your total monthly payments down to a serviceable level and actually put you on track to pay your credit cards off in this lifetime.
In today’s economy, credit cards and other high interest financing have become a necessary fall back for a large number of people. Between lost jobs, lower wages, and increased energy costs, for some families, there simply is not enough money to cover everything. The problem, however, is that the falling economy has not just hurt consumers; it has hurt large companies as well. One industry particularly hard hit was the credit card industry.
Record unemployment has caused less available money for people to maintain their minimum payments. Bankruptcy guidelines have made it easier for someone who makes less than 50,000 dollars a year to receive protection against having to pay their credit card payments at all. Changes to the credit reporting guidelines have decreased the average national credit score by over 30 points in the last year. For all of these reasons, credit card companies have been making less and less profit, and this decrease in revenue affects you very much.
Because there are fewer customers who are regularly paying their credit cards on time and more borrowers going default on their revolving monthly debt, the credit card companies are forced to rely more on the customers who do make timely payments. Increased interest rates across the board are accounted for by the need to cover a larger loss by fewer paying customers.
However, there are options for those who have not missed their payments. What was once a poor option for personal finance has become a more and more viable choice. Unsecured personal loans typically carry interest rates around 12% for a good borrower, which was once too high of a rate for them to make sense, but as interest rates rise on credit cards, 12% become more and more competitive. In addition, unlike credit cards, these loans are actually made to be paid back in full.
As unsecured loans become more and more competitive, and until a better, competitive lending alternative arrives, the industry will certainly see an increase in production. However, more importantly, coupled with this increase, we will see a much larger number of borrowers whose overall financial position has increased to match.
Unsecured loans have many functions, but one of the best is for consolidation of your credit card debt. Credit cards typically have a minimum monthly payment that will cover most, but not all of your interest charges. If the minimum is all that is ever paid, then the balance will continue to increase, and payments will be made to the credit issuer forever. This can quickly turn into a hole with no way out.
Making this phenomenon even worse is the fact that most credit cards are going through periods of increased interest rates. For many reasons, it has become necessary for the banks that issue these cards to increase the interest rates in order to maintain profits. For borrowers who are only making the minimum payments, the problem of paying this debt off becomes even worse.
An unsecured personal loan can shoulder a lot of the burden of repayment. Unsecured loans, as opposed to credit cards are fully amortized. Amortization is basically the process of determining a set monthly payment that will pay, every month, a set amount to your principal and to your interest, so that your loan is paid off after a certain number of months. These repayment periods vary from loan to loan, but are typically between 1 and ten years.
The biggest problem with this financing is that, in terms of comparison, a fully amortized loan will have a much greater payment than a loan that is only paying off interest, assuming they both have the same interest rate. With minimum payments, you are basically only paying interest and fees. With a scheduled repayment, you are paying interest as well as whittling away at what you owe.
However, in today’s lending world, most unsecured loans will actually have a lower interest rate than the cards being paid off. Due to the higher historic approval guidelines of these loans, they have a much lower rate of default than most credit cards, and as a result, have lower interest rates as well. In these situations, most times it is possible to have a similar payment as with the credit cards, but while actually paying off the debt, due to the lower rate.
Unsecured loans are not the right answer for every situation. Nevertheless, for borrowers who are constantly paying the minimum payments on high rate credit cards, they are a very effective alternative. By locking an interest rate and securing an amortization schedule, unsecured personal loans ensure that your payments are actually eliminating your debt.
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