Bad Credit Personal Loan

Approximately 1/5 of all nonmortgage installment loans are personal loans, says Jane C. Yoa, managing director for surveys and statistics for the American Bankers Association. "It's a product that banks are finding a demand for in the market," she says.

Many banks don't advertise that they offer unsecured loans because they are not as profitable as other loans. They bank would rather offer a credit card because it is a long term commitment, ongoing in many cases.

Using a credit card for short-term loans isn't the best option for the typical borrower. The high interest rate can accumulate more in interest payments. Plus, you must be very disciplined to only use the card for that loan. You have to pay it off like a loan; minimum payments could take you decades.

First, you need to decide how much money you really need. Look for the least amount of money that will make everything work out. Look at your credit situation and decide if you truly can afford one more loan. If you don't have an emergency fund, you may find that you have few other options.

Once you know that you will need to take out a loan, start shopping around. Terms can vary and you want to find the best rate possible. Call around and talk to all the banks in your area, plus some national lenders. Don't just go to a payday lender, talk with your bank or credit union first.

What kind of rates should you look for? Two year personal bank loans are averaging above 11.8% for interest rates. Credit unions may offer better rates and terms than banks, because they often are non-profit institutions.

Short-term unsecured loans can be found at 96% of all credit unions, and many make loans in amounts less than $500. Most people borrow an average of $2,300. Many loans under $500 can be made with a quick limited credit check.

When it comes to your terms, look at the total cost of the credit, not just the monthly payments. While you may want to pay the least amount possible per month, a longer payback period means you pay much more in interest.

Look for any hidden fees and charges. You don't want to pay for credit insurance, buying clubs or other extra fees. If you don't understand what a fee is going towards, make the loan officer explain it. Ask about each charge and fee.

Read everything carefully before you sign it. If you are told something different than what is in writing, only trust the writing. Once you have signed something, any verbal conversations mean nothing. You have no agreements unless they are in writing.

Don't let the officer talk you into borrowing more money than you need. Recently a loan officer offered me $5,000 more than I was asking to borrow. I didn't need the temptation, the added interest costs or the extra debt, so I politely refused. Many officers receive a commission based on the loans they approve. Know what you need to borrow and stick with that amount.

Often, the bank will offer you a credit card instead of an unsecured loan. This isn't a great idea. The rates aren't fixed and can change during the course of the loan. Credit cards are considered revolving credit, which means you have no set repayment date. It might sound attractive, but in two years you could be paying 23% interest. Can you afford the risk? Instead, ask for a specific loan amount with a fixed interest rate and a repayment schedule.

And finally, start saving! Next time you won't need to take out a loan if you already have the money in a savings account. While you are at the bank, go ahead and set it up.