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Are Unsecured Personal Loans Right for You?
Unsecured personal loans are funding options you can use for just about anything. This includes unexpected expenses, debt consolidation, and the like. Not only that, but unsecured personal loans are considered installment loans. This means you will borrow a certain amount of money and repay it with interest charges on a fixed monthly payment schedule.
How To Qualify For an Unsecured Personal Loan
Lenders most likely want to be sure that you are capable of repaying the loan on time. Hence, before they approve your loan application, they still might need to assess the risk by evaluating various factors. The following are some of the factors lenders commonly check to determine whether you qualify to take out an unsecured personal loan:
Credit scores will give the lender an idea of how likely you are to repay debts. The higher your credit score, the more likely you will get a loan with favorable terms and a low interest rate. But if your credit score is low, you're likely to land a loan offer with significantly higher interest and more stringent terms.
Your income is one factor that lenders will look into because they want to make sure you make enough money to handle your debts. That is why it is best to consider your income before deciding to get any loan type for your needs.
The debt-to-income ratio shows your debts to your income. This helps the lender see if you have too much debt or can't handle adding another loan. Moreover, the lower this ratio is, the better chances you have of getting your loan application approved.
Benefits of Unsecured Personal Loans
The main difference between the two types of loans is that a secured loan requires collateral, and an unsecured loan doesn't. Besides that, there are other advantages to unsecured loans as well:
- You can take advantage of an unsecured personal loan to pay a wide variety of expenses. This includes unexpected repairs and major purchases.
- They usually come with fixed monthly payments and fixed interest rates. This makes your finances easier to budget.
- Most of the time, unsecured personal loans offer borrowers flexible repayment terms. This will most likely range from 12 to 84 months.
- You can choose from a wide range of loan amounts that might range from $1,500 to $100,000.
What You Need to Watch Out For
Although unsecured personal loans carry many advantages and are a good option for most people, it would be best to watch out for the following:
Since collateral is not required, unsecured personal loans tend to have higher interest rates than secured loans. Interest rates usually range from 5% to 36%. However, this will depend on your creditworthiness and the lender.
Most of the time, lenders charge you fees to cover the loan process. These fees most likely range from 1% to 6% of your loan amount.
In some cases, lenders will charge you fees if you pay the monthly payment earlier than expected. However, when you pay your loan early, this means you can save some cash on interest charges. That is why it would be best to avoid unsecured personal loans with prepayment penalties.
What if You Default on an Unsecured Personal Loan?
Having late or missed payments and defaulting on an unsecured personal loan will not cost you any collateral. However, it will most likely hurt your credit score because your payment history is one of your credit score's most significant factors, and even one late payment can affect it.
If you miss a payment, the lender will inform you (most likely more than once) regarding the matter. Also, the lender might provide you with a 30-day grace period to help bring your account current. Moreover, if you fail to do so, the lender will be left with no choice but to try to get payment from you one way or another.
Unlike other types of installment loans, like home loans and auto loans, unsecured personal loans don't require you to place the item you are purchasing as collateral. However, this does not mean that the lender can't go after you to recover its losses if you start to default on your loan. The lender has the option to either take you to court to try to garnish your wages, send your account to a collection agency, or attempt to get hold of your property to pay your debt.
Unsecured personal loans are a great funding option for just about anything you need. It also offers a wide range of loan amounts, flexible repayment terms, and fixed interest rates. However, you need to note that an unsecured loan is not your only option. So, before you decide what loan type is right for you, it would be best to consider how much you need to borrow, the purpose of getting a loan, and how quickly you can pay off the debt.
David Owens is a seasoned content writer specializing in finance - debt management, entrepreneurship, and business finance.
When not writing, he travels with his cat, Mellie.