Personal Loans: The Basics
A personal loan is simply a small loan that is given to private consumers by lenders. It does not have any specific use required. You pay back the loan over a fixed term period, which means that you typically pay off the loan within three to five years. Interest rates are often fixed but can also be variable. People use these loans to refinance debt, purchase cars, repair homes, and much, much more.
Secured Vs. Unsecured
Most people that are trying to determine if this is the right type of finance for them are comparing unsecured personal loans versus secured ones. The differences are simple but significant. Secured personal loans are secured against the value of an asset. Most people use their car or home to secure a personal loan. This means that if you can’t meet your financial commitments to the bank, they can seize your personal property to help pay themselves back.
Unsecured Personal Loan Bad Credit
If you don’t have a good credit score, you will find it hard to get an unsecured personal loan. This is because banks are less likely to want to lend something to someone with a sub-par score if they have no collateral to liquidate to get their money back. It may be annoying, but you’ll have to do a bit more work to try and get accepted for this type of loan. Fortunately, there are plenty of new lenders in the industry that are making it easier for people with bad credit to get personal loans for items they need to purchase. Either way, you need to make sure that you get your credit score in the best shape possible before you apply for anything. You don’t want to end up getting rejected for a loan, it will damage your credit score even further and make it less likely that you’re approved again in the future. Follow the few tips provided below to improve your credit before you apply for an unsecured personal loan.
Pay Off Your Credit Cards
A big secret that people often don’t realize is that paying down your credit card debt is the quickest way to improve your credit score. If you carry large balances on your credit cards, it doesn’t look good on your credit report. Credit reporting agencies calculate your report by using your credit usage and limit as a ratio. If you can reduce the amount of credit you are currently using, you can quickly improve your credit score. It will only take a month at the most for your score to be updated, so you won’t have to wait too long.
Get Incorrect Items Removed
Check your credit report to make sure that there aren’t any incorrect items. If there are, you can apply to have them removed by the credit reporting bodies that monitor credit scores. Sometimes, these bodies will not remove items that you feel need removing. In this case, you should contact a credit repair company to ask them if they can help. They may also be able to help you remove other items on your report that might not necessarily be incorrect. They’re very good at getting inquiries taken off your credit report.
After you’ve taken these steps, you should make sure that you shop around for a lender. Because you have bad credit history, unsecured personal loans are a bit harder to get. You need to find lenders that are willing to take a chance on individuals with poor credit histories. This requires a bit of extra research. There are plenty of online forums where people discuss the types of financing they are able to receive for certain credit score levels, this is often a good starting point if you’re trying to get some perspective on your options.
Ask for Full Cost of Loan
When you decide to start comparing unsecured personal loans, it’s important that you ask for the full costs of the loan from your lender. One of the unique advantages of having an unsecured personal loan is that it is a term loan. This means that it is easy to view the amount of money you will be liable for paying over the course of your loan. Unlike a credit card, which is flexible, personal loans are rigid and easy to predict. When you’re comparing these types of loans, you can simply ask the lender for a full breakdown of the loan. This should include a total cost that will represent the full price of what you owe. It’s the best way to compare prices. It doesn’t let false advertising get in the way of what the true value of the loan is. You don’t want to be tricked by a low interest rate that also has hidden fees.
Advantages of Unsecured Personal Loans
After reading the majority of the information on this page, you might have a better idea of whether or not an unsecured personal loan is right for you. But it can be hard to take in a lot of information all at once. That’s why we’ve created this concise list of pros and cons to help you get a better and clearer understanding of if personal loans are right for you and your situation. Check out the advantages below.
- Less Risk – You’re not risking your family assets by having an unsecured personal loan, you won’t have to secure the loan using any valuable assets that will impact your family’s financial security. This is a huge plus if you end up defaulting on the loan.
- Term Loan – Unsecured personal loans are term loans, meaning they are paid back at a fixed interest rate over a set amount of time. This is advantageous because it helps you keep good payment habits. They’re much easier to pay off than credit cards. You can also see the total cost of the loan before you make any agreement.
- Lower Interest Than Revolving Credit – Unsecured personal loans tend to have lower interest rates than credit cards or lines of credit. This is because they are not forms of revolving credit. If you know how much money you need to borrow, unsecured personal loans are a great option.
- Unrestricted Money – Unlike with some loans – such as a mortgage – unsecured personal loans have no restrictions on how you use the money that you borrow. This means that you can use the money for whatever you see fit. This is a huge relief if you don’t have to have to spend hours justifying your loan purpose to your bank.
- Wide Range of Lenders – There are a variety of both traditional and online lenders that offer people unsecured personal loans. If you’re planning on applying for an unsecured personal loan, you’ll literally have hundreds of lenders to choose from.
Disadvantages of Unsecured Personal Loans
As you can see above, there are plenty of benefits to having an unsecured personal loan. But there are also some drawbacks that you should consider prior to applying for one. Read below to see what you need to consider!
- Higher Interest Than Secured Personal Loans – The reality is that these types of loans are much riskier for banks as they have no way of getting their money back if you decide not to pay. If you want to have an extremely low interest rate, you’re better off going with a secured personal loan provider.
- Harder to Get – Unsecured personal loans are also harder to get than secured personal loans. This is because of the risks involved for lenders. If you have a bad credit history, it will be easier for you to get a secured personal loan.
- Not Flexible – As with any personal loan, unsecured personal loans are not flexible. You will have to pay back set amounts of money over set amounts of time. You will also have to apply for a new loan if you want to increase the amount of capital that you have borrowed.
It’s Easiest to Apply Online
The personal loans industry has expanded rapidly online. You’ll find that there are hundreds of lenders in the market that are competing for borrowers. Instead of having to drive to a branch and meet face-to-face with a bank, you can now find really great interest rates online. In fact, many online lenders can offer lower interest rates than brick-and-mortar banks because they don’t have as many overhead charges. In addition, it creates a much better lending experience for those borrowing money. You can get an instant decision by simply inputting a few personal details. Online lenders are also typically able to get you money within 24 hours of a lending decision. They electronically transfer you funds to make the entire experience as hassle-free as possible. It’s also much safer to give your sensitive information over the internet. Many top lenders have extremely high-end encryption technology to protect your data. If you go into a bank branch and hand over your personal information, anyone could end up getting access to it. The benefits of applying online are endless, hence why we recommend our readers use online lenders as a first port of call.
Unsecured personal loans are a great lending product for people who don’t want to risk their assets when they borrow money. If you fall on hard times, you won’t have to worry about having your home or other assets reclaimed. You should still remember that it will damage your credit score if you miss payments or default. Make sure to use a reputable lender that has a presence in the industry. We help partner our readers with some of the top performing lenders in the industry. We provide non-biased suggestions to help people get the most out of their lending decisions. Check out our homepage. Remember, unsecured personal loans are more expensive, but they also carry less risk. If you can afford the premium interest rates, they’re a good option if you want to protect your family’s assets!