With credit cards canceled and limits cut, consumers may be looking for
new ways to get through the holiday shopping season, cover an emergency
expenditure or consolidate their high-interest credit card debts. One
alternative might be personal loans, offered by banks, credit unions or
even companies typically considered credit card providers.
These loans are unsecured -- meaning that no collateral, such as a car
or a house, is required for approval -- and come at a fixed interest
rate and are in place for a fixed term. That's the biggest advantage to
borrowers over credit cards: Personal loan terms don't have some of the
"tricks and traps" federal regulators have associated with credit
cards, so you won't face a ballooning monthly payment or skyrocketing
interest rate. And, in most cases, they can be used for whatever
purpose the borrower desires.
"We usually have a tick-up in requests around tax time and the
back-to-school period," says Scott Pellegrini, consumer lending product
manager at Addison Avenue Federal Credit Union, based in Palo Alto,
Personal loans are risk-based
Addison Avenue, like many other financial institutions, rely on risk-based pricing -- looking at a consumer's credit score and credit history to determine interest rates, which vary from person to person.
In recent months, personal loans have been gaining traction as a means
to pay off higher-interest debt. "Across the board, I think people are
looking to consolidate debt and get out from underneath it," Pellegrini
Wells Fargo, headquartered in San Francisco, has had success with its
"Debt Pay Down Solution," introduced in late 2007 and marketed strongly
since late 2008, says Brent Vallat, senior vice president and business
manager for personal credit management.
Consumers are able to use the Wells Fargo Web site
to calculate how long it will take them to be debt-free. The site helps
them examine their budget and offers suggestions as to how they can
save on expenses. It then offers the option to use those savings to
more quickly pay down debt.
Interest rates vary by state and length of the loan, and as Wells Fargo
assimilates former Wachovia Bank locations, the product will be
introduced to those customers as well.
|UNSECURED PERSONAL LOANS
VS. CREDIT CARDS
|Type of loan
||Can terms change?
||Can you borrow more?
Vallat compares customers who have embraced the plan to those who "got
religion. They're very passionate about it. This is a really
disciplined way to take control of debt."
Not just for banks anymore
It's not just banks and credit unions that have such products. USAA,
best known for offering insurance products to military members, offers
an unsecured personal loan of up to 48 months with an annual percentage rate as low as 12 percent for customers with an excellent credit history.
"It's truly no strings attached," says Joseph "J.J." Montanaro, a
certified financial planner with San Antonio-based USAA. Customers can
use it to pay off debt or make purchases, as they see fit.
Sometimes, personal loan solicitations can come from surprising sources. A recent mailing from Discover
offers personal loans of up to $25,000 and allows consumers to choose
the amount they'd like to pay back each month, as well as the length of
Rates range from 7.99 percent to 18.99 percent, depending on a person's
credit risk. If someone receives a $10,000 loan at 7.99 percent, they
may choose to pay anywhere from $313 a month for 36 months to $175 per
month for 72 months.
Mike Berg, a magazine editor in Westwood, Calif., took advantage of a similar offer from Capital One
last year when he needed to sell his condominium "in a really bad
market" because of a job move, and was underwater on his mortgage.
He used a $30,000 personal loan from Capital One with a 7.99 percent
APR, as well as personal savings, to avoid a short sale on the condo
and make up the difference between the unit's deflated sales price and
what he and his wife still owed on the property. "There were no hoops.
It was an easy solution."
Berg received the offer because he is a Capital One credit card
customer, and within about 10 days of filling out the paperwork, he had
Some are scaling back loans
Because of the current economic climate, Capital One, based in McLean,
Va., has scaled back its personal loans, only offering them at their
brick-and-mortar locations in a handful of states, says spokeswoman Pam
Girardo. Rates now range from 10.49 percent to 17.95 percent, with loan
lengths ranging from 24 months to 84 months.
While Capital One and Bank of America
have halted their direct mail solicitations for personal loans, others
are still going strong. During the third quarter of this year, 80
million solicitations were sent out, says Andrew Davidson, senior vice
president of Mintel Comperemedia, a direct marketing research firm
which has its U.S. headquarters in Chicago.
Across the board, I think people are looking to consolidate debt and get out from underneath it.
|-- Scott Pellegrini
Addison Avenue Federal Credit Union
Of those still sending out personal loan solicitations, Citibank tops
the list, with a 20 percent market share, followed by Discover, with a
14 percent share. While no credit union has more than a 1 percent to 2
percent market share, many have "very competitive offers," Davidson
A study done for the Filene Research Institute, a think-tank backed by
the credit union industry and located in Madison, Wis., found that a
36-month unsecured consumer loan offered by banks had an average APR of
about 13.8 percent, while credit unions averaged about 12.1 percent.
According to a Citi
spokeswoman, the bank's average personal loan is for $8,000, with an
average interest rate between 15 percent and 16 percent. She said some
people opt for personal loans rather than credit cards because "some
consumers like the discipline of set terms."
A double-edged sword
While an unsecured personal loan can be a good way to pay off
higher-rate debts, it can be a double-edged sword. "It's another debt
you have," USAA's Montanaro says.
Ryan Himmel, a certified public accountant in New York and founder of BIDaWIZ.com,
says whether a person should apply for a personal loan all depends on
their plans for the cash. It's one thing if the consumer wants to make
an unnecessary purchase; it's another if it's used to pay for something
A consumer should ask herself: "What is the loan for, and how do I plan
to pay it off in the future," Himmel says. "If they don't ask, that's
when they get into trouble."