What is an unsecured personal loan?
Generally speaking, there are two types of loans: secured and unsecured. Secured loans are backed by some form of collateral, such as a house or vehicle. Unsecured loans are not backed by collateral, and are usually more risky for the lender.
Unsecured personal loans are fixed-rate loans which are typically repaid in monthly installments over a specific term – anywhere from two to seven years on average.
Why get an unsecured personal loan?
The main benefit of a personal loan is that you can normally use the money for whatever purpose you want. For example, you could use a personal loan to consolidate and pay off your debts. You can also use it to finance a large purchase or even cover a major emergency expense. With an unsecured personal loan, you won’t need to worry about collateral.
Top reasons people get an unsecured personal loan
- Debt consolidation: You can eliminate your debts faster by rolling them into one, getting a lower interest rate and using a personal loan to pay it off.
- Home renovations: A personal loan is a great way to cover the cost of doing major work on your home, such as installing a swimming pool or doing a kitchen remodel.
- Large expenses: You can use your personal loan to buy a car, boat or any other big ticket item.
- Weddings: Many people use a personal loan to pay for their wedding expenses. Don’t let a lack of funds get in the way of your special day!
How do I qualify for an unsecured personal loan?
To determine if you qualify for an unsecured personal loan, a lender will look at several factors including:
- Your credit score
- Your credit report
- Your debt-to-income ratio
Lenders range from major financial institutions like banks and credit unions to online private lenders. In general, you’ll need a good credit score to qualify for a personal loan from a bank.
When it comes to online lenders, most of them will allow you to pre-qualify and see estimated interest rates without affecting your credit score, so it’s always a good idea to shop around and do your research.
How to pick the best personal loan
It’s important to compare rates from different lenders as you shop around for the best personal loan. Look for the loan with the lowest APR. It will usually be your best option.
You should also consider the loan’s term and monthly payment amount. Longer terms mean lower monthly payments, but you’ll be paying more interest over the entire life of the loan. Find the right monthly payments for your budget.
Depending on your situation, some features of the loan might be beneficial to you. For example, if you’re using the loan to consolidate your debt, some lenders will send the funds directly to your creditors. In some cases, lenders will offer flexible repayment options which might fit your needs.
Best personal loan rates
Personal loan interest rates typically vary from 3 to 36%. The rate you’ll get from the lender will depend largely on your credit score, income and debt-to-income ratio. The better your determining factors, the lower rate you’ll be likely to get.
If you have a steady income, low debt, a long credit history and a record of on-time payments, your chances of getting a personal loan with a low interest rate will greatly improve.
Remember to shop around and compare rates to find the best one!
Debt consolidation loans for borrowers with fair credit
If your credit is not so great, and you’re looking to consolidate your debt or finance a major purchase, consider an unsecured personal loan. It’s a great way to get your debt under control and start the process of rebuilding your credit.
What to know before you choose an unsecured personal loan
- Get to know your credit score. Your credit score will shape your personal loan options, so it’s important to know what it is as you shop around for loans. Consider postponing getting a loan to rebuild your credit so you can get a better deal.
- Shop around and compare. There are so many different options available when it comes to personal loans that it pays to do your research and compare rates, features, and lenders.
- Get a co-signer. If your credit is bad, consider getting a co-signer to help you get a personal loan.
- Look into a secured loan. If you can put up a vehicle as collateral, you’ll likely be able to get a lower interest rate on your personal loan.
- Evaluate your financial health. A personal loan can help you address your debt and rebuild your credit. Don’t get a personal loan if it will only add to your financial difficulties. If your debt is out of control, consider debt-relief options.
Unsecured personal loans are fixed-rate loans which are typically repaid in monthly installments over a specific term – anywhere from two to seven years on average.