No Emergency Fund? A Small Personal Loan May Be the Answer
Black Enterprise magazine Fall 2019 issue

An unexpected expense can be a major hurdle for many Americans. According to the Federal Reserve Bank, 40% of adults would not be able to cover an unexpected $400 expense without having to sell something or borrow money. And, over 25% of adults have skipped necessary medical care because they wouldn’t be able to afford the bill.

When it comes to relatively smaller expenses (i.e. not a mortgage, new car, or student loans), a small personal loan can make expensive surprises more manageable. Is a small personal loan the right option for you, or is there a better choice?

Who Can Benefit from Small Personal Loans?

If you don’t have emergency savings ready in the event of a car breakdown or some other costly event, then borrowing money may be the only way to cover your costs. A COUNTRY Financial® Security Index survey found a quarter of women, a quarter of African Americans, and over 35% of participants making under $30,000 per year were not confident they could pay their monthly bills within one month of losing their job. This means many people are living without emergency savings.

A small personal loan can cover a sick pet, a new washing machine, or even a major dental procedure for those without the extra cash on hand. It can also be a more cost-effective way to consolidate credit card debt.

How Much Money Can You Secure with a Small Personal Loan?

Lenders typically offer small personal loans of $5,000 or less. These loans are meant to be paid off within two or three years.

Since banks make money from interest, they would rather offer a loan to a person who wants to borrow much larger amounts of money. However, you can still find lenders willing to offer smaller loans.

Secured vs. Unsecured Personal Loans

What is the difference between a secured and unsecured personal loan? The answer is a lien. A lien is collateral, or an asset, such as a house or car, that the lender can take possession of if the loan can’t be paid. Many small personal loans are unsecured, so they don’t require collateral.

Fixed-Rate Loans

Most small personal loans have fixed interest rates, so the interest rate won’t change over the course of the loan. This keeps your payments predictable, though rates may be higher.

With variable-rate loans, you’ll only pay interest on what you borrow if you don’t borrow the full amount in your line of credit.

financial emergency

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Where Can You Find Small Personal Loan Lenders?

You can secure small personal loans through a number of institutions and organizations.

  • A national bank or “black bank” that serves African American communities
  • Your local credit union
  • Your employer (some employers offer employee loans)
  • Online lenders
  • Your local, nonprofit Community Loan Center

It’s best to use caution when searching online lenders since you’re more likely to find predatory lenders online than at your local credit union. In fact, online lenders are reported to charge higher interest rates on minorities, making 11 to 17% more in profits off minority borrowers. Companies like LendingTree or Lending Club are popular, but picking a lender requires much more due diligence.

While more banks are starting to offer small loans, a credit union is often the best option for access to small loans. Why credit unions? Unlike banks, credit unions are not-for-profit organizations owned by the members who use their services. Banks may ask for larger collateral to ensure loan repayments (e.g., your home or car), but credit unions make loans more accessible. Because they are not-for-profit, you’ll often find more reasonable interest rates. In addition, credit unions may be more likely to lend to individuals with lower credit scores.

However, not everyone is a member of a credit union, and you must be a member to qualify for a loan. Your research should include all available options to find the best loan.

Can You Get a Small Personal Loan If You Have Bad Credit? 

One of the biggest barriers to securing a loan is a bad credit score. Without good credit, a bank can’t be confident the borrower will repay the loan in full, if at all. Is it impossible to get a small personal loan with bad credit?

Not necessarily. A bank won’t be the easiest place to secure a personal loan with bad credit, but you can find online lenders who market to borrowers with a credit score of say, 550. Companies like MoneyMutual and CreditLoan.com offer short-term, small personal loans to borrowers with bad credit.

It’s important to remember the worse your credit score, the higher your interest rate may be on the loan. Before we speak to good payment habits, let’s first make sure you pick the right loan.

What to Look For in a Loan

When you shop for a loan, you should look for the following features:

  • Low-interest rates
  • Low origination fees (i.e., processing fees for a new loan)
  • Low monthly payments or longer repayment terms
  • Loans unsecured by collateral (if your credit is good)
  • Warning signs of predatory behavior
  • No hidden fees

What Are the Warning Signs of Predatory Lenders?

As you do a Google search for online lenders, you may find companies that guarantee a loan in return for a fee to be paid in advance. These advance fee loans are scams that should be avoided at all costs. No loan is absolutely guaranteed, and knowing this can help you avoid falling prey to bad practices.

How to Qualify for a Small Personal Loan 

Lenders will need specific information about your financial situation to determine if you are a “safe” borrower. As you apply for loans, you may be asked to provide:

  • Credit score
  • Employment information
  • Possible collateral
  • Bank account information
  • Proof of income or your last pay stub
  • A driver’s license or another form of identification
  • Credit union membership if applying through a credit union

If you meet the criteria set by the lender, you should prepare the documentation and send an application. Once your application is sent and approved, you can begin your repayments.

Best Practices for Repaying Your Loan

Repaying your small personal loan on time will not only keep missed payments from compounding, but it will also help your credit score. Healthy financial choices will help you pay off your loan faster.

  • Keep a Calendar—The best way to make sure you don’t miss a payment is to keep a calendar or set payment alerts to your phone. When life happens, it’s easy to forget about due dates.
  • Pay Online—If you have a checking account, then it’s more convenient to make payments and check your balance online.
  • Pay Extra—No, not more than your loan amount. Pay a bit more than your minimum payment each month (if possible) to pay off your loan faster and avoid more interest.
  • Make Payments More Frequently—Instead of paying one large sum each month, use a percentage of your bi-weekly salary payments to make smaller payments more frequently.
  • Ask for Help—A debt counselor can help you manage your debt and pay off your debts faster. If you need more time to pay off your loan, ask your creditor if a longer repayment term is possible. There’s always help available.
small personal loans

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Alternatives to Small Personal Loans

The Pew Research Center reports African Americans are more likely to borrow and lend money from/to family and friends than white and Hispanic Americans. Whether it’s less access to loans or trust in community over banks, African Americans are more likely to find alternative ways to secure capital.

Though, are all alternative options reliable? Is financing in the form of a payday loan a better option than a small personal loan? Are credit cards a better option? And what other options exist?

What Are Payday Loans?

Payday loans are very small, high-interest loans that assume the borrower will repay the loan at the time of their next paycheck. Nearly anyone can get a payday loan, including borrowers with bad credit.

These loans are commonly maxed at $500, and full repayment is typically due within two to four weeks. They can be repaid using regular income or your social security or pension payments.

When you get a payday loan, you can authorize an electronic debit or write a post-dated check up front for the amount of the loan (and any fees) and give it to the creditor to be withdrawn or cashed on the loan’s due date.

However, this type of loan is not legal in every state, and there are many reasons why you shouldn’t consider one.

Payday loans generally ask for a $15 to 30 fee per $100 borrowed. In addition, if you opt for the check or electronic authorization not to go through on payday, then that amount will roll over to the next month and grow interest. It’s not hard to see why this is seen as a predatory loan, since many people who need small personal loans are already tight on cash each month. Add growing interest each month, and you could end up with an even larger amount of debt.

Small Personal Loan or Credit Card?

The two may not seem so different at first; both borrow money or credit and pay it off on a certain date with corresponding interest rates. However, there are very important differences to consider.

Credit cards are extremely convenient, and secured credit cards can help those with poor or little credit build their credit score. However, credit cards typically have higher interest rates than personal loans.

You should also consider that your credit card is still available even after you have repaid the debt. A small personal loan goes away. Depending on your financial goals and spending habits, that can be a good or bad thing. However, credit card accounts that are open and age over time help your credit score. And, many credit cards can give you helpful cash back rewards on certain purchases.

Other Ways to Secure Money

If you don’t want to borrow money and have debt in the back of your mind (especially if you already have student loan debt and other monthly payments), then you should consider finding assistance in other organizations. Nonprofits and religious organizations may be willing to help with certain finances depending on your circumstances. Speak to your employer, family, friends, and even the mechanic fixing your car to see if there is alternative financing, discounts, or flexible options for securing funds.

Shop Responsibly

If $1,000 or $3,000 is all you need to avoid a broken appliance or a worsening medical condition, then think about small personal loans you can repay in small increments over the course of a few years. While you shop, remember to look for the best rates and avoid offers that seem too good to be true.