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A Personal Loan: Better Deal than a Credit Card?

The other day, American Banker reported that the old-fashioned unsecured personal loan may be making a come-back. Once upon a time, back in those ancient days before credit cards and color TV, that's what people resorted to when they needed dough in an emergency or wanted to purchase something -- or a batch of somethings -- that couldn't be financed by a lay-away or installment plan.

The vehicle is pretty simple. You borrow a set amount at a fixed interest rate and make regular monthly payments over, say, three or five years. Then you're done. No variable rates. No confusing multiple balances and rates for purchases, cash advances and balance transfers. If you don't repay, you'll have a collection agency after you -- and pay a late fee. But you won't risk losing your house as you would with a home equity loan.

Among the banks promoting personal loans now: Wells Fargo, Discover Financial, Citi and CapitalOne. Wells Fargo says that it will lend from $3,000 to $100,000 for a term as long as five years. From Citi, you can borrow from $300 to $7,500. The banks keep the rates top secret until you apply, because they are "risk-based" -- in other words, they vary according to your credit score. However, a Wells Fargo rep told me that my rate for a $10,000 five-year loan would be about the same as the rate on my credit card, about 13 percent. And there's a $50 origination fee. When I sighed in disappointment, he asserted that even if my rate were 15 percent, I would likely come out ahead with a personal loan. It might be a close call on the numbers. A fixed payment rather than one based on the average daily balance might indeed save a little money. But on the psychology, he's right. How many times have you vowed to pay $500 on your bankcard only to wimp out and pay $300 because you spent too much on chai lattes that month -- or manicures. The $200 you didn't pay stayed on your balance and accrued more interest for the bank. My payment, by the way, for a $10,000 loan for five years at 15% would be $238 a month.

Unlike a credit card, a personal loan isn't flexible. You wouldn't use one to charge a book at Barnes & Noble, a shirt or a pizza. But if you need a big clump of money for a large, unexpected expense -- say, both of your cars need new timing belts at once, an uncovered medical bill (for that face lift) or consolidation of other debts with higher interest rates, a personal loan with a no-nasty surprises fixed payment can make a pretty sensible choice.

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