Unsecured Personal Loans - Take the Bite?
There are good reasons to take unsecured personal loans, but make sure that you are the right candidate. The great majority of unsecured personal loans are marketed to borrowers with bad credit. Be wary of being lulled, hook line and sinker, into a loan that only increase your debt problems.
That is not to say that unsecured personal loans cannot best serve your needs. Make sure that you optimize your loan mix so that you get the best interest rates available at the most convenient repayment terms.
In order to help you make the best financial situation, learn about:
- What is an unsecured personal loan?
- When an unsecured personal loan is a good idea?
- When an unsecured personal loan is a bad idea?
If you have maxed out your credit cards and are looking for other sources to borrow money, the idea of personal loan consolidation comes up. Don’t be fooled and swallow shallow marketing hype. If you are a good borrower, look for an unsecured personal loan with lower interest rates than your credit card debt. If you have bad credit, then personal unsecured loan consolidation is expensive.
What is an Unsecured Personal loan?
You are undoubtedly familiar with different types of loans. Secured loans are one common type of loan, and include home mortgage loans and auto loans. Lenders offer those types of loans against collateral that you provide as security for the repayment of the loan. That means, if you do not pay on time and default on the loan, the lender seeks to foreclose on your house or repossess your car. In addition, if there is a balance left over after your car or home is sold, then the lender may be able to pursue a court judgment and force you to pay any remaining debt.
Lenders offer unsecured loans based on a borrower's personal guarantee to pay back the loan. Lenders rely on credit reports, credit score, debt to income ratios, and employment and housing stability to determine the risk involved in offering you a loan. If the lenders rate you as a high-risk, then your loan will have high interest rates and fees, if you qualify at all.
One of the most common types of debt is credit card debt. It's one form of unsecured personal loans. Credit card debt is flexible, with a revolving balance and interest charged on the amounts borrowed.
Here are some general characteristics of an unsecured personal loan:
- Purposes/Reasons to take: Among many reasons, unsecured personal loans are taken to cover emergency costs, pay for big-ticket items (appliances), vacations, weddings, and for debt consolidation.
- Terms: Unsecured personal loans are offered for short terms, between 1-5 years, in general.
- Interest rates and Fees: Interest rates are high, even from a top lender to a borrower with a high credit score. Big banking institutions' personal unsecured loan rates vary, from about 10.8% to 30%. Rates from online lenders often carry very high fees and penalties, beyond their high interest rates. Be careful!
When is an Unsecured Personal Loan a Good Idea?
When You Reel It In!
If you have good income and a high credit score, then you are a good candidate for an unsecured personal loan. Big banks offer unsecured personal loans, generally to their own clients, for many purposes, including consolidating high-interest rate credit and retail cards.
If you qualify for this type of unsecured loan, then you benefit by paying off a high-cost debt at a lower interest rate, and with a fixed term and payment. After you consolidate debt, be disciplined and don't run up new debt.
A second reason to take an unsecured personal loan is to pay for a large ticket item or emergency bill. If you run up big debt on your credit card, then you harm your credit score, due to high utilization of credit lines. (Of course saving money for a big purchase, and having a rainy day fund are preferable alternatives to borrowing money).
For example, Wells Fargo personal loans are offered for debt consolidation or emergency costs. Interest rates start at about 10.8% (as of March 2012), which is not cheap, but less than many credit card and retail card interest rates.
When is an Unsecured Personal Loan a Bad Idea?
When You're on the Other Side of the Hook!
If you do not have good credit and a strong financial picture to show a lender, then an unsecured personal loan is not a good idea. You'll face very high interest rates and fees.
An exception to this rule is if you need quick money in an emergency AND you have the funds available to pay off the loan immediately. This type of unsecured loan comes at a very high cost, but helps you avoid defaulting on a bill or paying high overdraft charges. For example, an emergency, high-cost loan may be worth taking, to save you from having your car repossessed.
If you have bad credit, then an unsecured personal loan is not a good debt consolidation solution. It is too expensive and leaves you further in debt. Be wary of lenders that seek to reel you into what sounds like a good deal, only to find yourself at the other end of a collection line, causing you unwanted stress and financial expenses.