An unsecured loan is any type of loan that does not require the borrower to provide collateral. This can include personal loans, credit cards, and student loans.
When you’re considering an unsecured loan, it’s important to shop around and compare offers from multiple lenders to find the best rate. It’s also important to make sure you can afford the monthly payments and that you’re borrowing for a purpose that will help you achieve a financial goal. When used responsibly, an unsecured loan can be a helpful tool for managing your finances.
How Unsecured Loans Work
Once you meet the loan requirements, getting an unsecured loan is relatively easy. After completing a short application, generally what’s needed is proof of income and identification. If approved, the money is typically deposited into your account within a few days.
The repayment process for an unsecured loan is just as simple. You’ll work out a payment plan with the lender that fits your budget and usually make payments on a monthly basis. Of course, failing to make payments on an unsecured loan can have major consequences, including damaging your credit score and incurring late fees. It’s important to be mindful of the terms of your loan and make sure you can afford the payments.
What is the advantage of an unsecured loan?
The main advantages of an unsecured loan include:
- You don’t have to leverage any of your assets to secure funds.
- Your loan approval may be completed faster because there are no assets to evaluate.
- Unsecured loans may be a better option for borrowing smaller amounts.
What is the disadvantage of an unsecured loan?
The main disadvantage of an unsecured loan include:
- The potential for a shorter repayment period, higher interest rates, and difficulty obtaining approval for large loan amounts.
- Unsecured loans have higher interest rates than secured loans since they are not secured.
- In order to ensure repayment of the loan amount, lenders offer smaller loan amounts compared to secured loans.
Unsecured Loans vs. Secured Loans
When you’re considering taking out a loan, it’s important to understand the difference between secured and unsecured loans. The most significant difference between secured and unsecured loans is the need for collateral.
A secured loan requires borrowers to offer collateral, while an unsecured loan does not. This difference affects your interest rate, borrowing limit, and repayment terms. For example, a secured loan may have a lower interest rate because the lender has less risk.
However, if you default on a secured loan, the lender can take your collateral. With an unsecured loan, the lender has more risk, so the interest rate may be higher. But if you default on an unsecured loan, the lender cannot take your possessions.
Types Of Unsecured Loans
Lenders may offer unsecured loans for different reasons, but they share common factors. They usually range from $1,000 to $50,000 and are repaid in monthly installments over two to seven years.
A personal loan is a general use loan that allows the borrower to receive funding for a variety of purchases or financial issues.
Personal Line of Credit
A personal line of credit is like a credit card and typically holds a variable interest rate. An example of a personal loan is a revolving loan, which means the loan can be spent and repaid.
Unsecured Credit Card
Unsecured credit cards are a great way to build better credit, it also provides a predetermined line of credit to borrowers that they can use for any purpose.
Student loans are used for funding educational purposes and expenses. This type of loan typically holds more restrictions and payback instructions than other unsecured loans.
Where Can I Get an Unsecured Loan?
Unsecured loans are available from online lenders, banks, and credit unions. Rates, terms, and loan amounts vary for each type of lender. Each lender offers its own set of benefits and drawbacks.
Many online lenders offer pre-qualification, a quick process that involves submitting basic personal information and receiving a preview of the potential loan. This includes the loan amount as well as estimated rate and returns.
These lenders usually do a soft credit check with pre-qualification, which does not affect your credit score, and can give you an application decision within minutes.
Check with your bank to see if they offer unsecured loans, some banks offer larger loan amounts and lower rates for customers in good standing.
Although your bank is an option for an unsecured loan, they often only accept borrowers with strong credit scores, and some require you to apply in person as opposed to online.
Credit unions are organizations that may offer better rates for borrowers with fair or bad credit scores.
If you wish to obtain a loan, you must also be a member of the credit union. Typically, membership in a credit union requires living or working nearby, belonging to a specific group that the credit union serves, and making a one-time deposit of up to $25.
How Do I Qualify for an Unsecured Loan?
Several factors come into play when lenders are deciding whether you qualify for a loan and at what rate. Credit, Debt-to-income ratio, and bank account transactions are just a few, let’s take a look at how these factors help lenders when making their decision.
Your credit score is a key factor in the loan decision when it comes to most lenders. With an excellent credit score, you may have access to the lowest unsecured rates and largest loan amounts. While someone with bad credit will more than likely receive the highest rates.
Many Lenders also consider the length of your credit history and require borrowers to have at least two years of credit history.
Bank account transactions
Some lenders may want to take a look at your bank account to see the amount of money you have coming and going. This will help the lender understand how the loan payments would fit into your budget.
Your debt-to-income ratio is your monthly debt payments as a percentage of your monthly income. Lenders look at this to evaluate your current amount of debt.
If you have too much debt, a lender may decide the risk to repay the loan is too high. Some lenders prefer that applicants have a debt-to-income ratio below 40%.
How Do I Apply for an Unsecured Loan?
Before you apply for a loan, you can pre-qualify to see what rates and terms lenders can offer you, pre-qualifying shouldn’t impact your score. Those offers can be compared with loans that other lenders may offer.
You will need to provide basic information such as name, date of birth, social security number, annual income, and what you plan to use the loan for. Based on this information, the lender can give you a quote, if the terms of the loan are to your liking, you can move forward with the full loan application.
Before you apply for a loan, pre-qualify to see what rates and terms lenders can offer you. MyUSAFinance can help you find an offer that fits your needs without impacting your credit score. If you’re considering an unsecured loan, learn the pros and cons, what they can be used for, where to get one and how to qualify. MyUSAFinance can provide you with the loan options available so that you can make the best decision for your financial needs.
Once you’re ready to apply, you’ll need additional documentation such as W-2s, bank statements, pay stubs, or other proof of income. The lender will then run a hard inquiry into your credit report to verify your creditworthiness.