Unsecured Personal Loans - Looking for the Right Loan?
Unsecured personal loans are installment loans that don’t require you to pledge security such as a bank account, home, or vehicle. You can use the loan to pay off debt, make home improvements, pay for college, take a vacation, pay for a wedding, or any other personal needs.
There are good reasons to take unsecured personal loans, but make sure that you are the right candidate. If you have excellent credit, you can qualify for the best rates. Even if your credit is less than stellar, you can be eligible for a personal loan.
Make sure that you optimize your loan mix so that you get the best interest rates available at the most favorable repayment terms.
What is an Unsecured Personal loan?
An unsecured personal loan is a short-term installment loan, generally with a fixed rate and equal monthly payments.
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. However, if there is a balance left over after your vehicle or home is sold, you will still be personally responsible for paying back the debt.
Here are some general characteristics of an unsecured 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 vary so it is important to shop around. Check the rate and the fees and compare terms using the APR rate.
- Qualifying for a loan: 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. Lenders offer lower scores to borrowers with high credit scores.
- Who Offers personal loans: You can find offers from banks, online lenders and peer to peer lenders.
Pay Off Your Debt
If you have a high credit score and a steady income, then you are a good candidate for a debt consolidation loan.
One popular reason to take a personal loan is to consolidate debt. You benefit by paying off a high-cost debt at a lower interest rate, and with a fixed term and payment. If you are disciplined and don't run up new debt then you can easily improve your financial health.
Pay for Emergencies
Another reason to take an unsecured personal loan is to pay for a large ticket item or emergency bill.
Even if you don't have great credit an unsecured loan can still be a good fit. A personal loan is a quick source of money. Instead of running up your credit card debt and harm your credit score, you can take out a short-term loan with affordable payments.
When is an Unsecured Personal Loan a Bad Idea?
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 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. Although this type of loan comes at a very high cost, it 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 or to pay a medical bill.
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.