What is an Unsecured Personal Loan?
Recent statistics reveal that there is a record high of unsecured personal loan balances, totaling $177.9 billion. The average balance of these types of loans is $9,896.
If you think you may need a loan to help you cross a bridge in your life, ask this question: “What is an unsecured personal loan?”
Beyond what it is, you will want to understand the pros, and cons, what you can use it for, and how to qualify for one. Once you understand all these items, you can make an informed decision as to if this will help you financially.
To shed more light on such questions and more, keep reading. You will understand the full scope of unsecured loans here shortly.
What Is an Unsecured Personal Loan?
It lets you borrow without needing collateral. You do not need a house, car, or similar for approval of unsecured personal loans.
A lender will base their decision on whether to extend a personal loan to you on the information they can gather. This includes your income, credit history, and outstanding debts.
If you fail to pay an unsecured personal loan, the bank or lender cannot repossess anything you own. Instead, to get payment, they may sue. The biggest hit you can take from non-repayment can be on your credit.
Why Get an Unsecured Personal Loan?
It can be for almost any reason. The goal of personal loans should be to help you with a financial goal that you have. It should not add debt that will be unmanageable.
How Does Unsecured Loans Work?
Typically, someone will borrow it in a lump sum. This can be between $1,000 to $100,000. Usually, the borrower will pay it back in monthly installments plus interest.
In terms of APR (annual percentage rates) for an unsecured loan, it can run from approximately 6% to 36%. For someone with excellent credit, which can be a FICO between the numbers 720 to 850, the APR would be around 11.2%. A bad credit borrower can pay around 25.3%, which is for someone with a FICO of below a 630 score.
The APR for the personal loan will include upfront fees, such as origination fees. Some lenders will charge an origination fee for the time they spend processing your loan, and it can range from 1% to 10% of the amount of the loan.
When applying for an unsecured personal loan, you want to check if there are “prepayment” fees that would penalize you for early repayment.
Pros of Unsecured Personal Loans
The biggest benefit is that they are fast loans. A secured loan will require more documentation and it will make the process longer.
Plus, different from a secured loan, the lender cannot repossess property should you not pay them.
A borrower with an “excellent” credit score, this individual can qualify for competitively low rates. Even as low as those that are offered by a secure loan, too.
Cons of Unsecured Personal Loans
These are riskier loans for a lender to extend. That is why they have higher interest rates than that of a secured loan, particularly with bad credit borrowers.
The biggest downside to an unsecured personal loan is that if you default, it will harm your credit. The lender can sell the remaining balance of your personal loan. A debt collection agency can purchase it, and this will mean collection calls to you from a company not familiar to you.
Types of Unsecured Loans
A lender can send you marketing material for a variety of reasons to win over your business. Maybe a lender thinks you are getting married, or you wish to do some home remodeling.
The typical unsecured personal loan they will sell you is for monthly installments to be repaid in a time frame of two to seven years, in the loan amount ranging from $1,000 to $100,000.
Improving Your Financial Health With Personal Loans
If you are researching a loan that will make a positive impact on your financial goals, debt consolidation or a home improvement loan may prove beneficial.
Debt consolidation loans give you the ability to pay down existing debt with a lower interest rate. A home improvement loan is a way to borrow money but add value to your property. These are the best types of personal loans to get.
Discretionary Expenses
Experts will recommend that you save for discretionary expenses. This can include items like a vacation. However, if you must finance such an expense, a personal loan is better than borrowing the amount on a credit card.
It is good to weigh your options in such circumstances, and choose the option that is the cheapest, not necessarily a source that offers fast loans.
Unplanned Expenses
It happens to the best of us. Medical bills, emergencies, etc., can hit with no warning. However, if you are looking for an unsecured personal loan because of an unplanned expense, think of this as your last option.
There can be cheaper alternatives. In cases of medical bills, you may find you can make payments to the provider at zero interest.
Where to Go For Unsecured Loans
Good options can be a bank, credit union, or online lender. Every source will have pros and cons. The terms, loan amounts, and rates may vary.
What you will want to take into consideration most are the interest rate and monthly payment.
How to Qualify?
The biggest items that a lender will consider when deciding to extend you a loan are your credit, debt-to-income ratio, and the bank account transactions you have.
For your debt-to-income ratio, the lender may prefer that your DTI be under 40%. The higher your DTI, the higher the risk you are, and the chances are of them denying you.
For bank account transactions, lenders want to see how much money is going in and out. This helps them to determine if the loan will fit your budget.
Looking for Fast Loans?
Now that you have the answer to what is an unsecured personal loan, you may find that it is a good option for your financial situation. Here, we offer fast loans to help you be successful and achieve your financial goals.
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