If you need money, there are plenty of ways to get it. One option is to take out an unsecured personal loan.
- You can use the money for absolutely anything, and you are not required to supply collateral to secure the loan.
- Personal loans come with lower interest rates than credit cards. Loan amounts are typically from $1,000 to $50,000. Repayment terms are between one and five years.
- If you accept a loan offer, the money can be deposited into your account in as little as one or two business days.
What Can I Do With an Unsecured Personal Loan?
Many borrowers get personal loans to pay off mounting credit card debt. This strategy could save you or I a small fortune on interest over time, and the savings can be applied to the monthly loan repayments.
Personal loans can keep you on your feet if you have to make a job change, take time away from work or move across the country.
A no collateral loan can finance that exotic vacation on your bucket list. It can foot the bill for the cosmetic surgery you’ve always dreamed of.
Smaller personal loans can keep a roof over your head if you’re short on cash and can’t pay the mortgage or the rent. They can be used to finance major auto repairs that you or I might otherwise cover with a credit card.
Some lenders prohibit using personal loans for investing, starting a business or paying for education. Be sure to read the fine print.
How Do Unsecured Personal Loans Work?
These loans are available from banks, credit unions and online lenders. Approval will depend largely on your credit report, although your monthly income and expenses will play a role in the decision process as well.
The loan amount, repayment terms and interest rate you are offered will all depend on your credit worthiness. The better your credit, the better the offers.
Is a Personal Loan Worthwhile?
A personal loan will cost you money in interest and leave you with monthly payments you don’t have now. Make sure that the benefits of the loan will outweigh the costs.
For example, using a personal loan to pay off credit card debt is a savvy move that can revolutionize the overall health of your finances.
Investing a personal loan in cosmetic surgery can transform the way you feel about yourself and give you more confidence for the rest of your life.
Unsecured Loans Versus Secured Loans
Secured personal loans are easier to get than unsecured personal loans. That’s because these loans are backed by a tangible asset such as a motorcycle or a boat.
Secured loans are less risky for lenders. If you default, the lender will simply take possession of your collateral.
A secured personal loan from a bank, online lender or credit union will come with lower interest and more favorable terms than an unsecured loan.
Payday loans, title loans and pawn shop loans are also secured loans. However, the terms and interest rates on these loans are prohibitive.
Payday loans are secured by your next paycheck. Title loans are secured by your vehicle. Pawn shop loans are secured by whatever you surrender to the pawnbroker in exchange for cash.
These loans are a form of predatory lending. Unless it’s a matter of life or death, give these loans a wide berth.
When to Consider an Unsecured Loan
- You need money in a hurry.
- You can handle the fixed monthly repayments.
- You don’t want to risk your collateral.
Disadvantages of Unsecured Loans
- You’ll pay more interest than you would with a secured personal loan.
- You might need more money than the lender is willing to offer.
- These loans can be difficult to get if you don’t have a steady income.
Effects of a No Collateral Loan on Your Credit Report
If you prequalify for an unsecured loan, it will not affect your credit report. However, if you accept a loan offer, the lender will check your credit as part of the loan approval process. Your report will then show what’s called a “hard hit.”
A hard inquiry does not guarantee that you have been approved for a loan, but your credit score will suffer the consequences regardless.
Hard hits will typically lower your credit score a bit. However, if it’s just one hit, you can quickly regain the lost ground.
On the other hand, multiple hard inquiries within a short time are a red flag for lenders. It can look like you’re applying for credit all over town. Hard hits stay on your credit report for two years, so use them with care.
After approval, the lender will report your total loan amount and repayment terms to the credit reporting agencies.
Lenders prefer borrowers who demonstrate responsible use of credit over a variety of instruments. That includes mortgage loans, auto loans, credit cards, personal loans and lines of credit from a bank.
If your credit report is based solely on the use of credit cards, a personal loan can round out your credit usage and improve your overall credit score.
Paying off credit card debt with a personal loan can greatly increase your available credit. That, in turn, can raise your credit score significantly.
Qualifying for a No Collateral Loan
Your credit report and your credit score will largely determine whether or not you’ll get a loan. Your credit information will also dictate the loan amount, repayment terms and interest rate you’ll be offered.
Lenders look at how long you’ve been using credit and how well you’ve managed it. On-time payments are very important. Derogatory information like collections or judgments can count heavily against you and drag your score into no man’s land.
If you’re not already monitoring your credit, start doing so immediately. Some lenders have a minimum credit score requirement that you will have to meet in order to qualify.
Debt-to-income (DTI) ratio is a measure of how well your monthly income covers your monthly expenses. Lenders want to ensure that you have the means to repay a loan.
All lenders are not created equal. Some focus on helping borrowers with bad credit. Others cater to people with exceptional credit. Regardless of specialization, each lender has its own unique criteria which guide the loan approval process.
If you’re considering a personal loan, check out potential lenders online. Many of them provide information on their websites about the loan amounts and interest rates they offer. Comparison shopping can help you find the best possible fit.
Remember that preapproval, which includes a soft credit check, is no guarantee that a loan will be approved. Preapproval can, however, give you or I a general idea about the loan amounts, terms and interest rates we’re likely to be offered.
After getting preapproval, you must still complete a full application and undergo a hard credit check before you can get a solid loan offer.
Could an Unsecured Personal Loan Be Right for You?
Using a personal loan to abolish credit card debt is a smart move that can turn a bad credit rating around in a hurry.
Personal loans can cover medical emergencies, veterinary care or your child’s orthodontia. The loans are relatively hassle-free, and the best way to qualify is to keep your credit score as high as possible.
Have you ever had a personal loan? Would you get another one? Leave your answer in the comments section below.