Everything you need to know about unsecured personal loans
Unsecured personal loan options are some of the best loan options available today. These types of loans are popular among people who need money for;
- Debt consolidation
- Paying down credit card debts
- Covering a budget gap before your paycheck arrives
So what exactly is an unsecured personal loan?
These are the types of loans that don’t need collateral to get approved. Due to this reason, interest rates for these loans are quite high. Usually, lenders offer these loans based on your creditworthiness. It is therefore important to ensure that your credit history is in good standing before applying for the loan.
Additional information on unsecured loans
You can use an unsecured personal loan for any short term or even a longer term need. These are also a type of installment loans. It means that you borrow an amount of money and repay in equal monthly installment until the loan term ends.
Compared to other installment loans like mortgages and auto loans, you don’t need to issue any of your items as collateral. Lenders solely rely on your creditworthiness when approving these loans.
What if I default on an unsecured personal loan?
Since the loans are unsecured, it does not mean that lenders don’t have ways to recover their money in cases of default. They might, first of all, sell the loan to debt collection agencies. In extreme cases, a lender can even take you to court. Others try to seize your property in an effort to recover the money.
You can avoid such embarrassing scenarios by first of all knowing how these loans work. You also should evaluate your financial needs and determine whether the loans are a good option.
What you need to know about unsecured personal loans
Before approving the money, lenders would want to confirm that you can afford loan repayments. They do this by considering a few factors that we are going to discuss below;
Where you stand in terms of credit score can give lenders an idea of whether you can repay the debt. With a higher credit score, you can get the loan at an interest rate that you can manage. The opposite applies to those with poor credit scores.
A lender would also want to know whether you can comfortably repay the loan and remain with enough cash to cover your monthly budget.
Debt to income ratio
This is the ratio of your current debts to your monthly income. A lender can use this ratio to find out if the debts are more than what your monthly income can handle. Usually, the lower the DTI the higher your chances of getting approved for the loan.
My loan request is not approved, what do I do?
At times, your credit score, DTI, or level of income might not be enough to qualify you for an unsecured personal loan. In this case, you might go for a secured personal loan instead. With secured loans, you have to issue collateral (this can be your car, home, savings account, etc.). Since these loans are secured, it is easy to get approved even with a bad credit score. Note that the lender has the right to repossess your asset in case of default.
Does the lender perform a hard credit inquiry?
Usually, lenders will check your credit report as part of the approval process. Basically what they do is a hard credit inquiry. This can temporarily reduce your credit score by a few points.
However, it is not all lenders that perform hard credit checks. Others, especially online lenders, do a soft credit check. This is a less harsh type of check that does not have any negative impact on your credit score.
Where can I apply for an unsecured personal loan?
There are different types of lenders that offer unsecured personal loans. You can apply for the debt either online or in-store. Before applying, it is advisable to compare options from different lenders. This will make it easy to find a lender who offers the loans at convenient terms and rates.
Types of lenders who offer unsecured personal loans
This is actually the best place to start when looking for unsecured personal loans. Here, you can talk to someone face to face and have all your questions answered before applying. Banks these days also allow their members to pay bills and check account balances online. But traditional banks have stringent requirements for unsecured personal loans.
These are community-based organizations that also offer unsecured personal loans. The loans are available at convenient terms and rates.
Online lending is a very popular option these days due to a number of reasons. First of all, you can complete the application process from the comfort of your own house. The number of online lenders is also increasing every day. This makes it easier to find the exact type of loan you need. But still, ensure that you are working with a reputable lender before sharing your personal information.
Peer to peer lenders
Peer-to-peer lenders also do their business online. However, these loans are provided by individual investors. These investors offer the loans at a profit that varies depending on who you work with among other things. When looking for a peer-to-peer lender, the most important thing to look at are the fee charges. These lenders charge a higher fee compared to credit unions and banks.
At the end of the day, the lender you choose should offer the loan at convenient terms and affordable rates. The loan term should also be flexible enough to comfortably repay the debt. The lender should also have responsive and understanding customer service.
Advantages of applying for unsecured personal loans
The main reason why unsecured personal loans are popular is that they do not have collateral requirements. Other advantages include;
- There are no restrictions on how to use an unsecured personal loan. You can use the money for any short-term need.
- Unsecured personal loans have a fixed interest rate. The amount you pay per month is also fixed. This makes it easier to budget for loan repayments.
- Unsecured personal loans also have flexible repayment terms. The loan term ranges from 1 year to 5 years. You can therefore select a repayment term that suits you best.
- The loans are also offered in large amounts. You can qualify for a loan amount of up to $100000 or even more. You can get unsecured personal loans for huge projects like starting a business or doing major home renovations.
Things to watch out for
Unsecured personal loans are among the most convenient options you can find these days. However, there are a few things that you should pay attention to when applying for the loans. These include the following;
Lenders offer these loans based on your creditworthiness. Because of this, you should expect the interest rate to be on the higher end. Unsecured personal loans have high-interest rates as compared to auto loans and home loans. Usually, the rate can fall between 5% and 36%.
There are also lenders that charge this fee to process the loan. Origination fees range from 1% to 6% and are usually deducted from the loan amount.
This is the fee incurred when you repay the loan before maturity. Note that repaying the loan early can save you a lot of money on interest. This is why you should avoid lenders that charge this fee.
When is an unsecured personal loan a good option for you?
Unsecured loans might be a good option if you need money for emergencies. This can be unexpected medical bills, car repairs among others.
You can also use the loans for other purposes like paying off high-interest debts. This is referred to as debt consolidation. For instance, you can apply for an unsecured personal loan to pay your outstanding payday loans.
What you should never use an unsecured personal for
- To plan for weddings
- To go for vacations
- To purchase unnecessary items like a big screen TV
Spending the loan on unnecessary things will only increase your financial burden. If you want any kind of luxury, the best way to go about it is to save money.
Alternatives to unsecured personal loans
There are several alternatives to unsecured personal loans. Among them is a balance transfer credit card. You can also consider a home equity loan or home equity line of credit. These are some of the best alternatives to borrow money at affordable rates.
- By applying for an unsecured personal loan, you can access cash when you need it the most. The loans are available in large and small amounts. The loan term also varies and this makes it easier to repay the debt. But this is not the only loan option available. So if you can’t qualify for an unsecured personal loan, confirm whether it is the best option for you. Know;
- What you are applying the loan for
- How much money you need
- And how fast you can pay the loan and live a debt-free life again