Unsecured loans allow you to borrow money for almost any purpose. You can use the funds to start a business, consolidate debt, or purchase an expensive item. Before borrowing, make sure you understand how these loans work and other options available to you.
The Basics of Unsecured Personal Loans
A lender offering you an unsecured loan will not require any collateral or security to back the loan. With a secured loan, such as a mortgage, the loan is secured by the property. If you fail to repay the loan, the lender has the right to sell your home and collect the amount owed from the sale proceeds. For unsecured loans, nothing specific is designated as collateral. This makes them somewhat less risky for you as a borrower, since the consequences are not immediate if you default.
On the other hand, lenders take on more risk with unsecured personal loans. They do not have any property they can sell if you fail to repay the loan, but they have other options available if they wish to pursue repayment, such as taking legal action against you and attempting to garnish your wages. Because lenders bear more risk with unsecured loans, they typically charge higher interest rates compared to secured loans.
Your credit is one of the most important factors in determining whether you will qualify for an unsecured loan. If you have good credit, you will pay lower interest rates and have more options available for loans. For bad credit, you may not have many options, and you might need a co-signer to get loan approval. When applying for a loan, it’s a good idea to educate yourself more about how credit scores work.
Types of Loans
Lenders offer several types of unsecured personal loans, and each type comes with trade-offs. Look for a loan that meets your needs in the best possible way with minimal costs.
Signature Loan:
This is the most basic type of unsecured loans. As the name suggests, the loan is secured by nothing but your signature or promise to pay. You can find these loans through banks and credit unions, and you can use the funds for any purpose you wish. Just make sure you are aware of any restrictions that lenders may have regarding how the loans can be used to avoid legal issues.
These loans are typically installment loans that are paid off over time, so you borrow a lump sum of money and pay it back in fixed monthly payments until the loan is settled. These loans are a good option if you have good credit, as they usually have relatively low interest rates. Signature loans can also help you build credit so that borrowing becomes easier and cheaper in the future. To get a signature loan, tell your bank that you want to borrow money using a personal loan.
Personal Line of Credit:
A personal line of credit is another form of unsecured personal loans, but instead of taking the full loan amount at once, the bank will approve a certain amount that you can use and repay as needed. For example, you might have an unsecured personal line of credit for $15,000 and withdraw $5,000 from it to use for ongoing payments on a home renovation project.
While you repay the $5,000 loan, you still have $10,000 available in case an unexpected or large bill comes up, for instance. As you pay down the balance, the line of credit becomes available again for use. You only pay interest on the drawn portion of the line of credit, and you may be able to secure a lower rate compared to a credit card loan.
Cards
Credit as Loans:
Using credit cards is a form of borrowing for many people. When you use a credit card, you don’t get a large amount at the beginning of the loan, as you do with a signature loan. Instead, each time you use your card, you borrow what you need when you need it, much like a personal line of credit. If you need additional money later, you can charge more to your credit card up to your credit limit.
Credit cards are a popular solution because once you’re approved, you can borrow money practically instantly. Unfortunately, you will usually pay a very high interest rate on credit cards. Sometimes you can get a promotional rate and borrow at zero percent for a certain period, but these rates eventually end. It’s easy to get into trouble with credit cards, finding yourself paying hundreds of dollars a month just in interest fees.
To use a credit card as a borrowing tool, check your mailbox, which is likely to be filled with offers if you have good credit. You can also search online for credit cards that offer zero percent or low interest deals.
Peer-to-Peer Lending:
This new type of funding allows you to borrow from individuals instead of borrowing from a traditional lender like a bank. Many sites let you post a loan request online, and people have the opportunity to contribute to funding your loan. These loans, like signature loans, usually have fixed payments with competitive interest rates. They also allow you to borrow a decent amount.
However, your credit rating remains a factor in most cases. There may also be an origination fee on peer-to-peer loans. For example, if you borrow $2,500 and the origination fee is 20%, you will only receive $2,000 at funding, but even if you pay back the amount the next day, you will still owe $2,500. To get a peer-to-peer loan, try visiting one of the popular personal lending sites like Prosper or LendingClub.
Student Loans:
These unsecured loans provide funding for students to cover education costs. They are often a good option because student loans come with features that can’t be found elsewhere, such as flexible repayment options, grace periods, financial aid, and more. With some loans, it doesn’t even matter if you have good credit. However, you must be a student and use the funds for school-related costs. It’s also important to note that student loans cannot be discharged in bankruptcy court, so you are bound to them forever until you pay them off.
To obtain a student loan, start by visiting your school’s financial aid office. The people working in this office, who deal with these loans daily, will guide you through the process of completing the required paperwork and help you understand your options.
Each loan in this section will have its own unique rates and terms. Use your loan calculator to get an idea of what your repayment looks like:
Which Loan is Right for You?
When reviewing your loan options, decide which criteria are relevant to your decision and consider the following:
- Student loans have reasonable interest rates, and most individuals can qualify as long as they are enrolled in courses at an accredited college-level educational institution. These loans provide a longer repayment period and typically have a grace period before you need to start repayment. However, you may only use this money for tuition and related school costs.
- They provide
- Credit cards and personal lines of credit can provide money for many borrowers. However, the lower your credit scores, the higher the interest rates you will pay to compensate for the repayment risks they pose to lenders. People with good to excellent credit can benefit from zero percent credit card offers from credit card companies, although these rates typically expire after 12 to 18 months.
Signature loans and peer-to-peer loans offer money at reasonable interest rates, and you may be able to find more attractive rates through your credit union or bank, especially if you have deposited funds. These loans often allow borrowing amounts between $1,000 and $35,000 with a repayment period of three years. You may find it difficult to get approved if your credit scores fall into the “acceptable” category or lower.
These loans can be more attractive and cost-effective, depending on your financial situation. However, you may not qualify for a larger loan if you do not have sufficient monthly income to support the lender’s requirements.
Options If You Have Bad Credit
Getting an unsecured loan with bad credit can be challenging, but it is not impossible. You will have fewer options and are likely to pay higher interest rates than a good credit borrower. If you are having difficulty borrowing, learn how to get an unsecured loan with bad credit. If an unsecured loan is not approved for you, try to obtain a small secured loan backed by cash in the bank to build a positive credit history.
If possible, wait until you build your credit so you can obtain loans with more attractive terms. You can strengthen your credit by borrowing and repaying loans, and even small loans can make a difference. If you currently have low credit scores, be proactive in rebuilding them.
Source: https://www.thebalancemoney.com/unsecured-personal-loans-315518
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