About Bank Rates on Personal Loans

Are you thinking about getting a personal loan from the bank to make minor repairs or consolidate other bills? Typically, interest rates are lower for loans secured by collateral than they are for unsecured loans. Rates and amounts available to borrow will vary depending on each borrower's credit score, income, source of income, and other outstanding debt.

Types

A fixed rate means that the borrower will pay the same interest rate for the life of the loan; therefore, the monthly payment should stay the same. A variable rate means that the interest rate will fluctuate with the Federal Reserve stated rate. Borrowers' payments may go up or down monthly. An unsecured loan means that the borrower is not offering any collateral. Therefore, if the borrower defaults, the bank has nothing to reclaim. Conversely, with a secured loan, the borrower offers to give up something in the event of a default such as furniture, car, or even a home in the case of a home equity loan.

Size

Dollar amounts available for personal loans vary depending on the bank where you are applying. Some offer unsecured personal loans for as little as $500, but $2,500 is more common, and most seem to top out around $25,000. The amount of a secured personal loan is usually based on a percentage of the value of the collateral. The bank will base the interest rate on the risk perceived and whether or not the borrower has collateral.

Considerations

Borrowers desiring unsecured personal loans will have to pay interest rates that are at least 2 to 3 times the interest rates of secured loans unless they happen to be borrowing from the Pentagon Federal Credit Union. PenFed only offers services to government, military, homeland security, and related institutions and groups. Personal loan borrowers may also pay fees that increase the effective stated interest rate.

Time Frame

Most banks offer unsecured personal loans for a period of 12 to 48 months. This allows the banks to earn interest to cover the cost of processing the loan. Secured personal loans may be for much longer periods. Interest rates charged may be lower for shorter offered terms and higher for the longer offered terms.

Benefits

The bank rates offered on personal loans to borrowers may be significantly lower than credit card interest rates. A borrower could save a significant amount of money by taking out a personal loan to pay off credit card debt. The debt would also be paid off in a fixed length of time. However, the borrower may need to close the credit card accounts to avoid regaining high balances.

Warning

Currently interest paid on personal loans is not deductible for borrowers when completing their federal income taxes. However, if the loan is backed by the borrower's home, such as a home equity loan, the interest may be deductible. Check with your bank or tax professional.

Resources

• Personal Loan Center
• Compare Rates
• Loans Wiki