Guide to Unsecured Personal Loans
Unsecured personal loans are one of the best financial products due to their lack of limitations. Although, the lack of limitations come with a price, for example, higher interest and no security to bail you out if you default. Another ideal thing about unsecured personal loans is they can be used for basically anything.
If these perks piqued your interest, you can learn more about what an unsecured personal loan is, the affiliated advantages and disadvantages, what to look for when shopping and where to get an unsecured loan below.
What is an Unsecured Personal Loan?
An unsecured personal loan is borrowed funds that are not secured by an asset, as the name implies. Normally, borrowed funds have an asset attached to them so the lender has something they can claim in the event that the borrower defaults on the loan. For example, a mortgage uses the house as security which can be repossessed if the borrower stops making loan payments. Although, unsecured personal loans are the exact opposite because they do not have a connected asset. Usually an unsecured loan ranges from $1,000 to $35,000 and the loan term can be anywhere between one and seven years.
What are Unsecured Personal Loans Used For?
Unsecured personal loans can be used for essentially anything. That being said, keep in mind that the lender will consider your loan purpose when determining whether or not to approve your application. For this reason, your unsecured personal loan purpose should be legitimate in nature.
Advantages & Disadvantages
As with any personal finance decision, there will be a set of corresponding advantages and disadvantages. Unsecured personal loans are no exception, let’s explore the pros and cons below.
- No Collateral. Unsecured loans do not require an asset to be posted as security. This also means that you aren’t putting your valuables at risk of being lost.
- Simple Application Process. Compared to other forms of financing, the application process for an unsecured personal loan is quite simple. In addition, application approval has a more rapid turnover time.
- Funds from an unsecured loan can be used for an array of purposes. The only restriction you have is the lender’s approval of your loan purpose.
- No Collateral Doesn’t Mean No Problems. If you default on an unsecured personal loan, an asset isn’t there to protect you. Lenders can still come after you for payment which could result in a series of debt problems.
- High Interest Rates. Lenders face a greater risk with unsecured personal loans because if the borrower defaults, they don’t have an asset that can be seized and sold to cover the owed amount. For this reason, the interest rates on unsecured personal loans is generally much higher.
- Smaller Loan Amounts. Because of the greater perceived risk to lenders, they may shy away from lending you more money. For this reason, the unsecured loan you can get is typically lower than what you’d expect.
What to Look for When Shopping for Unsecured Personal Loans
Since the risk is greater with an unsecured personal loan, you may need to shop around more before you find an amazing deal. This is especially true with interest rates and hidden fees. Below is more detailed information to consider when shopping for an unsecured personal loan.
- To maintain realistic benchmarks when shopping, determine what you can afford within your budget. The last thing you want is a loan that you can’t afford which could cause a series of debt issues.
- Hidden Fees. Within your loan agreement, there might be details about one-time or on-going fees. It’s important that you’re aware of them before you sign your loan agreement otherwise you might be faced with an unexpected bill!
- Interest Rates. Interest rates should be competitive compared to other lenders and offers. Also, check for fixed or variable interest rates.
- Repayment Terms. Repayment terms for unsecured loans are often between one and seven years. The tradeoff here is a longer loan means lower payments, but you will also be responsible for that loan for an extended period of time.
- Minimum and Maximum Loan Amounts. Most lenders set a minimum and maximum amount that borrowers can take out for unsecured personal loans. Usually this range is $1,000 to $35,000, but it really depends on the lender. How much you need might not fall within this range which is something to consider.
- Loan Purpose Restrictions. Lenders have the right to restrict what their unsecured personal loan products can be used for. Try to find a lender that will approve a loan for your intended purpose. It is also important to note that lying about your loan purpose will never do you any good.
Where Do I Get an Unsecured Personal Loan?
You can get an unsecured personal loan from a bank, credit union or online lender. Lenders can vary a lot in their loan requirements and approval processes because they’re all different meaning it’s hard to know what to expect. When it comes to unsecured loans, lenders can be more strict because of the higher perceived risk. That being said, lenders can provide information on their minimum requirements for approval. If you have this information, you won’t get declined for a loan due to failure to meet a minimum requirement. Lastly, the larger the loan, the more stringent and tough the approval process will be. To lenders, more money means more risk so they will take the time to analyze the application as much as possible.
What to Expect During the Approval Process
To help you plan better for the application and approval process, it is useful to know what lenders take into account and consider. Let’s explore these items below.
- Basic Requirements. To qualify for virtually any loan, you will typically need to be the age of majority in your area, have a bank account and be able to present valid government issued identification.
- Credit Score and History. A classic item that lenders almost always look at is your credit score. In addition to your credit score, they will also assess other items on your credit report. A big item that lenders consider is credit history, the better you have been at paying lenders on time and in full, the more lenders will find you an attractive loan candidate. At this point, it is important to note that credit score and report considerations are more intense than with other forms of financing. Unsecured loans are risky for lenders so credit becomes more important.
- Employment History. In order for you to repay your loan, you need income from employment. If your employment history is spotty or you were unemployed for a period of time, lenders may be concerned about your ability to earn income and repay their loan. Usually lenders look back on the past two years of your employment.
- Income and Expenses. Income minus expenses equals net profit which is the money you’ll use to repay the loan. Lenders may ask for documentation related to your income and expenses to determine how realistic debt payments are. If you can, try to increase your income by getting another job or getting a raise and lower your expenses by cutting out what you don’t need or negotiating with lenders.
Is an Unsecured Personal Loan the Right Option for Me?
As with anything in personal finance, the decision to proceed with a certain financial option depends a lot on your current situation and goals. Before you start applying for unsecured personal loans, take the time to assess your unique situation and evaluate your goals. Below are some questions you can ask yourself when determining if an unsecured personal loan is right for you.
- Is there room in my budget for the loan payments?
- What is my loan purpose? Can it the expense wait for another time?
- Would a lender realistically approve my loan based on the purpose?
- What will I do if I default on the loan and the lender comes after me for payment?
- Do I meet the minimum requirements of lenders?
Unsecured loans are beneficial because of their lack of limits. However, those lack of limits come with a price in the form of interest and other fees. In addition, there can be other complications in the application process such as having to deal with a lower loan amount than you originally wanted. All and all, if you evaluate the pros and cons and determine that an unsecured personal loan is right for you, happy loan hunting!
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