Personal loans customarily gain popularity during the holiday season. A personal loan for the holidays may be more difficult to secure this year than in the past, depending on your credit score. Interest rates are low, which is less of an incentive for banks, which are currently hoarding reserves, to lend.
Why personal loans may be harder to get
It may be more difficult to get a personal loan for the holidays because banks can borrow money from the Federal Reserve at interest rates approaching zero. Instead of risking default by granting personal loans, installment loans, mortgage loans and other forms of lending, banks are using that money to invest for profit. A prime example of this is the massive purchase of U.S. Treasury bonds by banks in 2010. Banks have purchased $127 billion in Treasurys since the second quarter, while loans have decreased by $68.5 billion. In essence, banks can borrow money from the Fed at near zero interest, then loan it back to the Fed at a much higher rate in the form of Treasury purchases.
What to expect when you look for a personal loan
The reluctance of banks to grant personal loans for the holidays means that only those with very strong credit scores can expect success — from banks, that is. The average interest rate on personal loans with a decent credit score is 12 to 18 percent. But if your credit is less that stellar these days, it doesn’t hurt to start with the bank or credit union where you put your money. An established relationship may improve your chances. If that doesn’t work, numerous lenders offer personal loans online. However, a lower credit score could result in interest rates as high as 20 percent.
A holiday loan alternative
An interesting alternative to those high interest rates on a personal loan may be peer-to-peer lending. Peer-to-peer lending takes the bank acting as middleman out of the equation. On peer-to-peer lending websites, consumers lend money to each other. On some peer-to-peer lending sites lenders bid to offer borrowers lower interest rates. Lenders choose who they lend to and make loans from as little as $25 up to $25,000. Getting a personal loan for the holidays from a fellow consumer could land a competitive interest rate without a perfect credit score.