What Is An Unsecured Loan?
Unsecured loans are a type of personal loans that don’t require collateral. You can borrow a certain amount for whatever use and pay it back with interest. The monthly payments will be fixed and the repayment terms can range from 1 to 7 years.
An unsecured personal loan can start from amounts as low as $1,500 and go as high as $100,000 or more depending on a borrower’s creditworthiness.
However, because there is no security in place, these loans feature a comparatively higher interest rate.
Eligibility criteria are stringent and are directly dependent on your credit score. Borrowers must often pay origination fees as well. Additionally, note that the terms and rates are dependent on your credit score.
On average, a FICO score of 690 or higher means you’ll gain access to lower rates and flexible repayment terms.
Ideally, the loan amount is transferred to your checking account post-approval. Moreover, if you’ve applied for an unsecured debt consolidation loan, the lender may agree to transfer funds directly into the card or loan accounts. If you have stellar credit, it is rather easy to get approved. Still, unsecured personal loans also have some drawbacks. Read on to learn if it is the best fit for your financing needs.
What Are Unsecured Loans Used for?
There are generally few restrictions on how you use the borrowed amount when applying for an unsecured loan. You can use it for consolidating debts, medical bills, home improvements, or any other unexpected expense. Most lenders aren’t really concerned about how you use the funds, but some may restrict you from using the funds for certain activities like investing in a business.
When you need cash for a specific reason, an unsecured personal loan is the best option. That being said, we also recommend that you use an unsecured loan at your discretion. There are many cost-effective alternatives if you need quick funds for educational expenses, a wedding, or a vacation.
Pros And Cons Of Unsecured Loans
Let’s take a closer look at the pros and cons of unsecured personal loans:
- You can get quick approval and processing of funds with unsecured loans online. Unlike secured loans, you don’t need to furnish additional documents like a car title or a homeowner certificate.
- The lender can’t claim ownership of your asset if you default on payment.
- You can get extremely low rates and flexible terms if you have good to excellent credit. On average, lenders accept FICO scores of 690 and higher. However, if your score is 720 or higher, you can get an APR as low as 6% or even lower depending on the lender.
- As there is no need for collateral, unsecured personal loans have higher interest rates than other loans such as auto or home equity loans. Usually, rates range from around 5% to 36%, based on the lender, your credit history, debt-to-income ratio, and other requirements.
- Based on the credit score, the available loan amount can be quite low.
- If you default on payments, the lender will report it to the Credit Bureau. This will negatively impact your credit score. In extreme cases, lenders can even sue you to collect the outstanding amount.
- Some lenders might charge an origination fee on the loan.
Where To Get Unsecured Loans?
You can get the best unsecured personal loans from a variety of lenders, both online and offline. Here are a few types of lenders which offer the best unsecured loans:
- Credit Unions – If you’re already a member of the Federal credit union, you can get an unsecured loan easily from the lender. You might even be offered a more competitive rate than other lenders with which you don’t already have a relationship.
- Peer-to-Peer Lenders – You can apply for this online. The approval criteria and the process are the same, but the catch is that instead of one lender, your application goes to a pool of potential lenders. This means better chances of approval, however, make sure to compare the charges and rates.
- Standard Banks – If you have an existing relationship with a bank (checking account, credit card, or other account), we recommend speaking to a loan officer. Given you’re already a customer, the bank can give you quick approval and better offers than most.
- Online Lenders – When a face-to-face discussion is of little interest and you want to complete the entire process from the comfort of your home or office, an online lender may be the answer. A lot of new online lenders are available, just make sure to compare the rates to determine the best option.
How To Qualify For An Unsecured Loan?
Unsecured personal loans have strict eligibility requirements, and your credit score is the most important of them. Other requirements include a stable income and manageable debt-to-income ratio, in addition to proofs of identity and address.
If you think you may not qualify, follow these hacks to improve your chances of approval:
- Repair Your Credit – Make timely payments so you can improve your credit score. The higher your score, the easier it is to receive approval.
- Clear Current Debts – Try clearing existing debts before applying. When you clear debts, your debt-to-income (DTI) ratio falls. A low DTI assures lenders that you can manage the installments.
- Get A Co-Signer – If you’re stuck with bad credit, getting a co-signer can help you qualify and even access a competitive rate. However, the co-signer must have stellar credit and meet all requirements set by the lender.
Unsecured Loans Rates And Fees
Unsecured loans are good options for financing without collateral, but borrowers should be aware of the accompanying fees. Quoted APR rates often include origination fees, upfront fees, and other processing charges. The origination fee may range from 1% to 8%.
The interest rates on unsecured loans vary by lender depending on creditworthiness and other factors. They might range from 5% to 36%, but interest outside this range may also be available. Other fees may include a late fee on missed or delayed payments and prepayment penalties in the event you repay the loan before the term ends.
Unsecured personal loans can be a great way to manage debts or handle unexpected expenses. Getting the best rates ultimately depends on your credit score and debt-to-income ratio. We recommend that you consider your current situation and compare if this is the right fit for your needs based on creditworthiness and financing needs.