Unsecured personal loans explained
Sometimes in life, we all run into unexpected financial trouble that requires quick cash.
You may need funding to start a business, pay for medical bills that can’t wait, or even debt consolidation.
Whatever you need a loan for, it’s important to know how they work and find out if there are other cheap alternatives worth exploring.
What are unsecured personal loans?
These are loans that do not require collateral for you to be approved. They are offered on the premise of a borrower’s creditworthiness, rather than any form of security.
Since you don’t need an asset as security, lenders require that borrowers have a perfect credit score. In most cases, they’ll perform credit checks before they approve your loan request.
To be approved for a loan, your credit ratings must be high because that would mean your delinquency level is low.
Due to the risk involved, lenders are more cautious and will only lend out unsecured personal loans to borrowers with a perfect credit history and good credit. That way, they are sure they’ll get their money back.
For borrowers with bad credit, getting unsecured loans may be a daunting task but not impossible. You may still get funding, but lenders will charge a high interest rate to cover the risk.
If a borrower fails to pay their loans, lenders may take legal action against the borrower to have their wages garnished or forward their details to a debt collecting agency to help them recover their money.
Unlike unsecured loans, you’ll need to pledge an asset before you receive funding. It could be a car or a house.
These loans are easy to get and quite cheap because the risk involved is low. If a borrower defaults, the lender will sell the collateral to recoup his losses.
They come with a low interest rate and better terms compared to unsecured loans because the lenders are guaranteed that they’ll get back their money.
The only downside with this mode of funding is that you may lose your asset if you fail to comply with the lender’s terms and conditions.
Types of unsecured personal loans
Before borrowing, it’s important to explore the different options available to you and choose what works best for you. Below are different types of unsecured personal loans offered by lenders:
- Signature loans – these are loans offered on the premise of a promise to pay or the borrower’s signature. You can get them through credit unions or banks. They come with competitive interest rates and allow you to pay in equal monthly installments until your loan is fully repaid. They are also amortizing, so any fixed monthly payment you remit reduces the interest and principal. Works well for people with good credit scores and is a perfect way of building your credit ratings.
- Student loans – they are unsecured loans that offer students financial aid. They have special features like extended grace periods, interest subsidies, and flexible repayments. You don’t need a perfect credit score to get funding. You, however, have to be a student.
- Credit card loans – when you purchase goods or pay for services using your credit cards, you also borrow because you’ll still refund the money plus interest. Unlike signature loans, you don’t get the lump sum but can borrow up to your credit limit. You need to be careful because the more you rely on credit cards, the more the bills pile up, and you may end up paying hundreds of dollars as interest.
- A line of credit or revolving loan – these are also unsecured loans that give borrowers access to cash when they need it. They are usually a preset amount of money offered by banks or credit unions and allow you to draw up to a maximum amount. You’ll pay interest on the amount you borrow, and once you repay the borrowed funds, you can still borrow again as long as you stick to the lender’s terms and condition hence the name revolving.
Should you take out a secured or unsecured personal loan?
The decision depends on several factors because both forms of financing have their pros and cons.
Before you decide on whether to back-up your loan with an asset, you have to determine:
- If you have a valuable asset to use as security.
- If you can stand losing that property should you fail to pay off the loan.
If you answer in the affirmative, then a secured loan may be the best option for you. Apart from the risk of losing your property, you stand to gain a lot from using this mode of funding.
Some of the benefits include:
- Low interest rates and better terms – when you back-up your loan with a valuable asset, the lender will charge you a low interest rate because the risk involved is low. There’s a guarantee that he’ll get back his money and even if you default on payments, he’ll sell off the property to recover the money. You also get better and flexible repayment terms.
- Easy qualification – you don’t have to wait for long to be approved for funding. The asset is enough surety that you are a low-risk borrower.
- Unemployment is not a hindrance – although most lenders require that you have a job, you can still get funding with a valuable asset. They are more focused on the value of the asset than a job.
Advantages of unsecured personal loans
Below are some of the pros of using unsecured loans
- No risk of losing your property – since there is no property put on the line to qualify you for financing, you don’t have to worry about losing your valuable assets should you default on loan payments.
- Quick funding – you don’t have to wait forever to receive the funds. In fact, most online lenders can fund borrowers within the same business day. Unlike secured loans, there are no valuations on property used as collateral.
- You can get funding with bad credit – Most lenders require that borrowers have a good credit score, but if your business has a strong and stable cash inflow, they may still approve your request despite having a bad personal credit.
- High interest rates – since these loans are high risk, and the lender is never sure of getting his back his money; they will charge a high interest rate to cover the risk.Unlike secured loans where the lender can recoup his losses by selling off the collateral, unsecured loans depend on a borrower’s credit score and business strength. It, therefore, means these loans come with double digits interest rates and APR so that should the lender lend out to say, 100 borrowers at a higher interest rate, and 20 of them become delinquent, he will still make a profit.
- Shorter repayment periods
Lenders will allow you short repayment schedules for unsecured loans. it will force you to make huge monthly payments until your loan is fully repaid. You’ll need a stable cash inflow to cover the loan repayments, and still have enough to run the business otherwise you risk defaulting on payments which may, in turn, hurt your credit scores or hinder you from receiving funding in future.
- You may still not qualify
Although lenders will not require any collateral, approving you for funding may require you meet other requirements. Lenders want to see stable cash flows for a certain period of time. If you are a new business with no income history, you may not qualify for a loan.
- Limited loan amount
You may not get the money you need. Unlike secured loans where the loan amount you are eligible for depends on the value of the collateral, unsecured loans have a loan limit which borrowers cannot surpass.Secured loans, on the other hand, have no loan limit and borrowers can borrow whichever amount they wish to borrow depending on their credit score, the value of the collateral, and strength of their businesses. This makes secured loans ideal for major business purchases.
Does bad credit affect your ability to borrow unsecured personal loans?
For many lenders, bad credit is an indication of a delinquent borrower. It means you are always late with debt payments or you don’t pay them at all.
It, therefore, means that bad credit is a hindrance when you need funding. You, however, could still get lenders who are more lenient and can borrow out to borrowers who have stable income streams irrespective of their credit scores
Below are some tips you could use to get loans with bad credit
- Work on building your credit score
Since lenders will base your eligibility for funding on a good credit score, you can work on improving your credit to make you more eligible for funding. Take up small installment loans and pay them quickly to help increase your credit ratings.
- Compare Lenders
Do your research and compare different lenders before you settle for any. You need to check out for the following:
- Interest rates.
- Do they charge prepayment fees?
- Does the lender report your consistent payment to credit bureaus?
- How easy is their application process and how fast can you receive funding?
This screening procedure will help you settle down with an affordable lender.
- Avoid costly options
There are several types of unsecured loans available to borrowers with bad credit. It is, therefore, important to choose an option that is affordable for you and your business. Avoid credit cash advances because they come with triple digits interest rates and APR.
- Have a plan
Some lenders will lend you money based on your business plan. If your business is still new with no real revenue history, you can present a solid business plan to potential lenders. Some may see your business’s potential and give you the much-needed funding.
Before you take unsecured personal loans:
When looking for funding for your business or personal use, it is important to have the following in mind:
- What is the purpose of the loan? What do you intend to use the loan for? Have a clear budget on how you are going to use every cent. There is no point of paying back money that didn’t achieve its objective.
- Are you able to pay back the loan? What’s your current financial status? Are you able to finance the loan and still have enough to still run your affairs? Having a clear plan on how you’ll repay the loan will help save you from a damaged credit score.
- Have you explored other sources of financing? Since unsecured loans come with high interest rates, they are quite costly and may eat into your revenue. Instead of using them as the only option, you could explore other cheap alternatives. It’s important to settle for loans that even after the monthly payments, you can still maintain a steady profit margin.
Life happens, and sometimes unexpected emergencies pop up in our businesses or personal lives.
When faced with a situation that requires funding, it is important to settle for an option that’s less costly and is flexible to suit your needs.
Unsecured personal loans may carry no risks of losing your property, but they come with high interest rates and APR. You should, therefore, exercise caution when using this mode of financing.
If you decide to take these loans, have a plan in place on how you’ll repay the loan, and compare lenders before settling with the most affordable.
To get connected to affordable and reputable lenders, fill out our online loan application forms today and let us take the burden of looking for lenders off your back. Our happy clients say it all. We are here to make your funding needs easy and faster.