Learn About Unsecured Personal Loans

Personal Loan Application Form
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Unsecured loans allow you to borrow money for almost any purpose. You can use the funds to start a business, consolidate debt, or buy an expensive toy. Before you borrow, make sure you understand how these loans work and the other alternatives you may have available.

 Basics of Unsecured Personal Loans

When a bank offers you an unsecured loan, it won't require any property or collateral to secure or guarantee the loan. For example, you secure a mortgage loan with a property. If you don’t repay the loan, your lender has the right to sell your home and collect what you owe out of the sales proceeds. With unsecured loans, nothing specific has been pledged as collateral. This makes them a little less risky for you, the borrower, because the consequences are not as immediate if you fail to repay.

Lenders, on the other hand, take more risk with unsecured personal loans. They don’t have any property to sell if you don't pay the loan, but they have other options available if they want to pursue repayment such as taking legal action against you and attempting to garnish your wages, for example. Because lenders take more risk on unsecured loans, they generally charge higher interest rates than they do for secured loans.

Your credit is one of the most important factors that determine whether or not you’ll get an unsecured loan. If you have good credit, you’ll pay lower interest rates and have more loan options available to you. With bad credit, you won't have as many choices, and you may need a co-signer to get approved for a loan. Learn more about how credit scores work.

Loan Types

Lenders offer several types of unsecured personal loans, and each one comes with tradeoffs. Look for the loan that best meets your needs while minimizing your costs.

Signature loans: This is the most basic type of unsecured loan. As the name suggests, they are secured by nothing but your signature, or your promise to pay. You can find these loans through banks and credit unions, and you can use the money for any purpose you desire.

They are generally installment loans that amortize over time, so you borrow once and pay a fixed monthly payment until you've paid the loan off. These loans make a good choice if you’ve got good credit because they generally have relatively low interest rates. Signature loans can also help you build credit so that borrowing becomes easier and less expensive in the future. To get a signature loan, tell your bank that you’d like to borrow money using a personal loan.

Credit Cards as loans: Many people borrow by using credit cards. When you use a credit card, You don’t get a lump-sum at the beginning of the loan, as you do with a signature loan. Instead, each time you use your card, you effectively borrow whatever you need whenever you need it. If you need more money at a later time, you can charge more to the credit card up to your credit limit.

Credit cards make a popular solution because once you’re approved, you can borrow money practically instantly. Unfortunately, you'll generally pay a quite high interest rate on credit cards. Sometimes you can get a “teaser rate” and borrow at 0 percent for a while, but those rates always end at some point. It’s easy to get in trouble with credit cards and you can quickly end up paying hundreds of dollars per month in interest charges.

To use a credit card as a loan vehicle, check your mail. Your mailbox may be full of offers if you have good credit, or you can also search for credit cards with low or 0-percent promotional rate deals online.

Student loans: These unsecured loans offer education funding to students. They’re often a good choice because student loans have features that you can’t find elsewhere, such as flexible repayment options, grace periods, interest subsidies, and more. With some loans, it doesn’t even matter if you have good credit. The only hitch with student loans is that you have to be a student.

To get a student loan, start by visiting the Financial Aid office at your school. They will guide you through the process of completing the paperwork involved and help you understand your options.

Peer to peer loans: This newer type of funding allows you to borrow from individuals, as opposed to borrowing from a traditional lender such as a bank. Several websites allow you to post a loan request online, and people may or may not step in and fund your loan. These loans, like signature loans, generally have fixed-rate installment payments and competitive interest rates. They also allow you to borrow a decent amount. However, your credit score still remains a factor in most cases.

To get a peer to peer loan, try visiting one of the popular P2P lending sites, such as Prosper.com (review) or Lending Club.

 Options if You Have Bad Credit

It’s not impossible to get an unsecured loan when you have bad credit, but you may find it challenging. You'll have fewer choices and will likely pay higher interest rates than a borrower with good credit. If you’re having a hard time borrowing, learn about getting an unsecured loan with bad credit. If it's feasible, hold off on borrowing until you've built your credit up to the point where you can get loans on more attractive terms.

You can strengthen your credit by borrowing and repaying loans, and even small loans can make a difference. If you currently have a low credit score, you can be proactive about rebuilding it. Try a small loan secured by cash in the bank to get some momentum.