What is an Unsecured Personal Loan?

When navigating all the different types of loans you can apply for, it can get a bit overwhelming. That is why it is important to understand the different types of loans that you may encounter. This article will be talking about what an unsecured personal loan is:

What is an unsecured personal loan?

If you need to get extra money for debt consolidation, unexpected expenses, etc. then this type of loan you may be interested in. This loan is unsecured meaning that it doesn't require collateral on the loan. Collateral on a loan is something that promises you will repay the loan or get it taken away. An example of this is when you get a secured auto loan, if you don’t pay off your car, then your vehicle will get repossessed. Since this loan doesn't require that collateral, interest rates tend to be high and depend more heavily on the type of credit you have.

Do you qualify?

Due to the fact that lenders need to have more of a level of certainty that you will repay your debt back in full in and on time, they are going to be a bit stricter on who they give this loan out to. They will look at factors like your credit score, your income, and how much debt you have. If you don't qualify for an unsecured loan, then looking into a secured loan is a good alternative. A secured loan is usually easier to get approved for because of the collateral.

What are the advantages to an unsecured loan?

Besides the biggest advantage of the fact that there is not a collateral required for the loan, there are other benefits as well. They can be used to consolidate debt and pay for unexpected expenses. Even some unsecured loans come with fixed interest rates which allow easy budgeting because nothing will change. Unsecured loans also offer flexible repayment terms that range between one to seven years so you can choose what monthly payment would be best for you. You also have a variety from which the loan can be whether as low as $1,500 to an amount of over $75,000. While there are a handful of benefits, you also need to be aware of the drawbacks that unsecured loans can come with.

What are the drawbacks?

While it is a benefit that you don't owe a collateral on an unsecured loan, that is also a drawback. Due to the fact that the collateral is missing, unsecured loans can have higher interest rates compared to secured loans. Also due to the fact of no collateral, you may be charged origination fees. Origination fees are fees that some lenders charge to cover the cost of processing the loan and can range from 1% to 6% of the loan amount. On some occasions as well, the loan may come with prepayment penalties. Prepayment penalties occur when lenders charge a fee if the loan is paid off before the set payback time. However, when you pay sooner rather than later you can save money on interest charges. If you plan on possibly paying the loan back off sooner, it is smart to avoid loans with prepayment penalties.

Where can you find lenders?

Lenders can come from a variety of places ranging from large, traditional banks, credit unions, online lenders, and peer-to-peer lenders. Where you go largely depends on what's important to you when it comes to banking. If you want to be able to have a person to contact when something goes wrong, then a traditional bank may be right for you. If you want a community-based bank, then going to a local credit union would be what you would be most interested in. If you don't care about in-person service and want to do the whole loan process from home, then an online lender would be the avenue you pursue. If you choose to bank with an online lender be sure to look at the Consumer Finance Protection Bureau's online complaint database to review and compare online lenders. If you specifically want an individual investor who profits off the loans they fund, then this would be the best candidate. When looking at peer-to-peer lenders, keep a sharp eye out for fees. Whatever lender you choose, you should get the one that offers the best rate with the lowest fees on a loan length that aligns with your lifestyle.

Overall an unsecured personal loan is meant for when you need cold hard cash to pay for pretty much anything. Offering a wide range of interest rates, loan amounts, repayment terms, and fees associated with the loan, this loan is not for everybody. You must take a look at your lifestyle and choose a loan that can align with your lifestyle and budget. When doing that, you also need to make sure you have confidence in how the loan will eventually be paid off.