The return of the personal loan

By SmartMoney

Remember the personal loan?

A few decades ago, it was one of the most accessible ways to finance a big purchase, meet an unexpected expense or consolidate other debts.

Then came credit cards and home equity loans. Easy to get, even easier to tap and tax-deductible (in the case of home equity), they quickly trumped unsecured consumer loans, which often required an applicant to walk into a bank branch, bare his or her financial soul to a loan officer and jump through hoops to qualify.

Banks liked credit cards and home equity loans, too. They were much easier to underwrite and cheaper to manage. Until a couple of years ago, "most big banks would actually hand you a credit card application if you walked in asking for a consumer loan that was on the smaller side," says Gerri Detweiler, a credit adviser for consumer information Web site Credit.com.

But the real-estate crash and credit crunch vaporized home equity and credit card lines alike. Now, nearly 25% of American homeowners owe more on their mortgages than their homes are worth, according to First American CoreLogic. And in 2008 and 2009, credit card issuers have cut $1.5 trillion from consumers' available credit lines, according to research firm TowerGroup -- and will continue to cut through the end of 2012.

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These trends are giving new life to the demand for personal loans. For example, in the past year, applications for Wells Fargo's personal-loan products have registered double-digit growth. The loans, which can range from $3,000 to $100,000 and carry a rate between 8.5% and 26.25%, depending on one's credit history and relationship with the bank, are marketed as debt consolidation vehicles.

"We feel really good about (our product)," says Brent Vallat, the business manager for personal credit management at the bank. "It's the right product for the times, and it's a disciplined way for consumers to take control of their debts."

Not all big banks offer unsecured personal loans. For example, JPMorgan Chase has rarely, if ever, extended personal loans. "The credit card has basically eliminated the need for personal loans," JPMorgan spokesman Tom Kelly says.

The banks that do offer personal loans don't give them away like they once did credit cards or home equity lines. Wells Fargo, for example, requires prime credit and an existing relationship with the bank, Vallat says. That means you'd need to have a checking account with the bank and ideally something else (a savings account or certificate of deposit, for example) to help give the bank a clearer idea of how you manage your finances and your ability to repay the loan.

And make no mistake: A regular income is mandatory. If you've been out of work and need some help making ends meet, a personal loan isn't for you.

• Ready to tap your home equity?

Bobby Britting, a research director in TowerGroup's consumer lending service, says that personal loans, a market estimated at $100 billion and a drop in the bucket compared with the market for credit cards and home equity, could represent too much risk for too little pay to be worthwhile for most big banks.

"Just managing it across 50 states for not as big of a portfolio -- it's a lot of work," she says. "You can almost understand why, at this point when lenders need to focus on big things, they would say this is a niche market that we'd rather not deal with right now."

If you're in the market for a personal loan, you have several options. Here are two to consider and two to avoid.

Continued: But they can put you in a debt trap

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