What is Unsecured Personal Loans?(The Complete Guide)

Unsecured personal loans is among the cheapest ways to finance sudden life indulgence without feeling the pinch. This explains why most of the people lately shy away from the traditional paths of debt financing and embracing this fast growing method.

According to data from TransUnion, unsecured personal loans industry has seen double digit growth for the past few years totaling to 269% increase in unsecured personal loans uptake in the last 5 years.

What inspires this massive growth is changes in technology that makes unsecured personal loans the easiest debt financing to get approved for.

Banks and credit unions peg qualifications on  a person’s creditworthiness and not on the value of their assets and savings when approving their loans.

They are also among the cheapest with very favorable repayment terms unlike its alternatives; making the the best option for financing holidays, house renovations and debt consolidation.

In this article, you will learn what unsecured personal loans are, why they are a better option for you, how to qualify for one and also share the little insider tips that will ensure you secure the highest amount with the lowest interest rates possible.

What is unsecured personal loans?

Unsecured personal loans is money disbursed to your checking or savings account by the lender. You will be required to repay later under terms agreed when signing for one.

What separates unsecured personal loans from other debt financing options is that they are not backed by any collateral. They do not require you to pledge an asset like your house or tag your savings in order to qualify.

The main criteria for qualifying is your creditworthiness.

Lenders will access your credit worthiness to determine your risk factor. It is based on it that creditors will either approve or deny you a loan.

If approved, the amount you get, the interest rate (APR) and terms of payments are also pre-determined by how risky you are to the eyes of the lender. The lower the risk, the higher the amount you get and the better the terms you receive.

Advantages of unsecured personal loans

  • Low risk: One benefit of unsecured personal loan is that it does not require you  a collateral. And therefore, you do not stand to loose your assets in case you are unable to pay it back.
  • Quick money disbursement: In times of financial distress, you will want the money in your account as fast as possible. Unlike a secured loan which require more documents, when you apply for unsecured personal loans, you will have money in your account one hours to a day from the time your application is approved. You will receive the money the same day you applied for.
  • They are cheap: Borrowers with high credit scores enjoy better terms at par with secured loans. For instance, a 750+ FICO with low debt and stable income will get you interest rates as as low as 5% (the starting rate).
  • You get cash: Unlike other methods of debt financing, unsecured personal loans is more flexible. You get real cash in your personal bank account which you can withdraw any time. In as much as it is advisable you use it for the purpose intended for the loan, you can spend the cash the way you like as long as you repay it back in time.

Disadvantages of Unsecured Personal loans

  • Higher interest rates: These loans are risky in the eyes of the lenders. And, to compensate for this, most lenders charge high interest rates. The interest rates for most of unsecured personal loans range from a low of 5% to as high as 36%. Your credit score and other risk factors will determine the interest rate offer you will receive from your lender. However, all these information are provided to you during pre-qualification process.
  • Defaulting consequences: Your assets and savings are not affected when default on unsecured personal loans. However, your credit score will tumble and credit report tainted. If the loan amount is big, a lender may decide to take matters to court in an attempt to compel you to clear the debt.

How to qualify for unsecured personal loans

Lenders want to be sure that they will get back the money lent to you + interest. As a result, they will seek a few steps to help them gauge your ability to pay in future.

If you know what they want and take time to strengthen them, your loans will always be approved under favorable terms.  

Here is how you can improve your chances of qualifying for unsecured personal loans.

Step 1: Build a strong credit

Your credit score is the main and the most important factor when determining your creditworthiness.

An excellent credit score (FICO 750+) gives you a free pass in the eyes of most lenders. In return, you get qualified for most debt financing including unsecured personal loans and low APR credit cards without putting your house and car at risk.

Take steps to ensure your credit score scale up fast and find yourself in the green zone. The higher the credit score, the better the lending rates and terms.

Step 2: Have low debts

Most lenders use debt to income ratio (DTI) when determining your ability to repay debt.

Low DTI means you have low debt relative to your income.

Lenders are more willing to lend to persons with low DTI and stable income than those with high DTI.

One of the best ways to improve your debt to income ratio is by lowering your debt burden. You can do it by paying off most of your debts.

Step 3: Stabilize your income

Your income is a strong signal of your future ability to pay debt.

A stable income is a strong signal of your ability to finance your debt without defaulting.

Similarly, high income lowers your debt to income ratio, DTI.

Therefore, in order to qualify for unsecured personal loans, find ways to increase your income first before you start the process of applying for the loan.

Step 4: Add a cosigner

If your credit score is low or your income unstable, a lender may ask you to add a cosigner in order to strengthen your credit.

Both your credit score and that of the cosigner is taken into consideration to evaluate your ability to pay.

A cosigner will act as a trustee for the loan. If you fail to pay for the loan, the bank will start charging the cosigner without the need of taking further steps to retrieve the balance from you.

Step 5: Add a guarantor

Guarantor and a cosigner attached to your loan application process work to achieve the same end goal. They strengthen your credit score and guarantee to pay for the loan in case you default.

But unlike the cosigner (a second borrower), a guarantor’s role is to guarantee in case you default.

This removes a level of uncertainty from the side of the lender reducing the risk to manageable levels and therefore qualify you for unsecured personal loan with low interest rates.

Step 6: Employment history

It is rare for the lender to seek your employment history. But, in rare cases, when the information you have provided for pre-qualification are not enough, some lenders will require your employment history.

Having worked in one place for long and moved a few steps up the ranks is a strong signal of your job stability.

Where to get Unsecured personal loans

In the field of unsecured personal loans, different lenders offer different terms, interest rates and amounts for the same credit score. It is therefore a good idea to shop around for the best offer before jumping on board.

Here are the best places to get unsecured personal loans.

Online lenders

Online lenders make it possible to complete the entire unsecured loans application process seated on the couch.

They offer competitive rates and take te shortest time to get money in your personal account.

And due to their competitiveness, rates are lowered to attract borowers and therefore you get to enjoy the best rates and favorable terms you cannot get elsewhere.

Most of them offer free pre-qualification services where you get to preview the amount of money you will receive, the interest rates charge and monthly installments you pay based on the creditworthiness information you give them.

Ensure you work with reputable companies that receive excellent reviews for their services.

Credit unions

Credit unions is another place you can get the best offers for affordable loans.

They are nonprofit community based financial organization. As a result, credit unions are more willing to lend to people with bad credit scores and still offer very low interest rates which are capped at a maximum of 18% by law.

You however need a working relationship with your local credit union to get approved rightaway.  

Banks

A few banks offer unsecured personal loans. Often, the new class of online banks are the ones offering this kind of loan facility.

If you already have an established working relationship with the banks, chances are you qualify for a larger amount, low interest rates and better terms.

However, most banks prefer to work with excellent credit scores. Some will require you be present and sig for the loan in person which might be inconvinient.

Peer to peer lenders

Peer to peer lending concept works the same way as online lenders. The difference comes in that, for peer to peer lending, the loan comes from a person (an investor) who profits from the interest they charge you.

The website acts as a medium and a platform to regulate the lender and the borrower and facilitate the loan.

You can shop around for lowest fees and rates in the same site before settling down for the lender with the best offer.

Keep an eye on the fees.  If you not careful, the fees charged may surpass the normal rates offered by alternative lending platforms, ending up becoming more expensive.

Interest rates, penalties and terms of unsecured loans

Unsecured personal loans might be the best financing option for your next project. There are however a few things you should keep an eye on.

Interest rates

Unsecured personal loans have interest rates ranging from 5% up to 36%. The interest rates can be fixed or variable. An excellent credit score will guarantee you a lower interest rate.

Fees 

When seeking unsecured personal loan, you are bound to encounter fees like origination fees, late payment fees and prepayment fees.

Often, the origination fee is 1% to 8% of the loan amount and is included in the interest rate you will be offered.

Some lenders charge a pre-payment fee as a penalty when you decide to pay the whole loan amount earlier than agreed.  

Terms

You will receive terms depemding on your ability to pay and lenders policy.

If you income is low, the lender may decide to lengthen the time you will use to repay your loan and allow you to pay a small amount every month until you clear the loan.

What to do if you don’t qualify

There are times your application gets an adverse action. Do not panic.

This means the loan product you applied for was denied because of the information you provided. It might not be correct or sometimes you do not meet the loan application requirements.

Whichever is you case, do not be  discouraged.

Here is what you will do if the loan you applied for is denied.

Ask

The first step is for you to ask the lender why they did not approve your loan.

Often, the reasons will be mailed or emailed to you with an adverse action notice once you are denied one.

But if you don’t get it, simply go to the lender and ask.

Seek alternatives

You can as well seek alternative methods of getting the money.

Peer to peer lending platforms have come handy lately and have proven to be reliable.

You can also apply for a new discounted credit card. Or one that doesn’t charge any interest for a specified period of time.

Secure the loan

Chances are you got an adverse action because some information was missing. You might have gotten it also because you not creditworthy in the eyes of the lender.

To boost your credit score you can secure your loan with a collateral and you will get you loan approved.

Unsecured personal loans are becoming more popular and reliable lately.

This is because they tend to charge low interest rates and disburse large amount of money. This fact makes them very lucrative for large personal projects.

Make sure to compare from different lenders online for the best deal you can get.

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