Personal Loans Make a Comeback

At a time when banks remain reluctant to approve business loans, many are issuing more and more unsecured personal loans. SmartMoney reports that SunTrust Bank handed out 23 percent more personal loans through September 2011 than it did in the same period a year ago, while TD Bank issued 5 percent more personal loans. Wells Fargo and Capital One also say their personal loans are up.

It seems counterintuitive. Personal loans are not backed by collateral, the way business loans are, so why are banks approving more of them? One reason is that personal loans are easier to process. Banks still need to make loans, and many of them are reluctant to take on the pile of paperwork that goes with a mortgage loan or business loan -- especially a business loan in partnership with the Small Business Administration -- so many lenders are embracing personal loans.

The loans may be more risky because they're not secured by borrower assets, but they're also less risky because the amounts are lower. Most banks only make personal loans in the $10,000 to $25,000 range.

Another appeal for banks is the high interest rates they can charge for personal loans. The Federal Reserve states that the average interest rate on personal loans is 11 percent, but some of them come with a rate as high as 21 percent. The interest rate on loans to small companies is typically in the 7 percent to 8 percent range, depending on the size of the loan. And the rate on a 30-year mortgage is just 4 percent. Even a Lehman Brothers banker can do that math.

From the borrower's point of view, personal loans offer real advantages. They're easier to get, especially if you can show a good income, low debt level, and decent credit score. And they're useful in a couple of ways, beyond the obvious utility of cash in hand.

If you can get a reasonable rate -- in that 11 percent range -- you can use a personal loan to pay off a credit card balance at a higher rate. And you can use a personal loan to improve your credit score, because credit-card debt does more damage to your FICO score than personal-loan debt.

So if you own a small business and you're having a hard time getting a small business loan from your bank, maybe it's time to get personal.