Unsecured Personal Loans: All that You Wanted to Know!

May 18, 2012

Unsecured personal loans may be hard to come by in the current economic scenario unless an individual has a pristine credit record.

However, if you are battling a crippling financial situation with no assets that can be used as collateral, an unsecured loan may be the only factor that saves you from the brinks of bankruptcy.

If you are not sure what this form of borrowing entails; here is a look at what unsecured personal loans are, the different types of loans in this category, their pros and cons and how to get an unsecured loan.

What is an unsecured personal loan?

As the name suggests, an unsecured loan is one where the lender offers the borrower money without collateral; needless to say, the financial institution assumes a big risk by making such a move hence it normal for unsecured loans to have a higher interest rates as well as processing charges.

unsecured personal loans Unsecured loans have a surprisingly large range of lending given the risk factor; it’s possible to get loans from a few hundred dollars up to $100,000.

Although the natural course of action would be to approach your bank, you will find it harrowing to procure a loan from regular financial institutions since most of them are looking for a spotless credit history for high risk loans.

Fortunately, there are other avenues that offer unsecured personal loans designed to suit the requirements of various categories of borrowers.

So, it is possible to get an unsecured loan even if you have a less than perfect credit record. However, it is imperative to not be under the fallacy that unsecured loans are free money as many establishments will not only require you to sign a promissory note but also a guarantor.

The different types of unsecured loans

Two of the most common types of unsecured lending include Payday loans and credit cards. Since these loan products have flexible terms and their underwriting standards are not half as strict as those required by major financial establishments, many people find these loans suitable.

Credit cards

While it is possible to get 0% interest credit cards, you will have to pay through your nose if you go over the credit limit. Also, a lot of 0% lenders want to ensure that you are not already under heavy debt before offering you such a facility. Then, there are also other factors such as your credit score and income to contend with which will have a bearing on your eligibility for a credit card.

Payday loans

If the usurious interest rate which can go to the tune of several hundred percent per month does not bother you, and you only need a one time loan, Payday loans will be the right solution for you.

There are no credit checks to deal with and you can get the money within a few hours of application; however, you will need to have proof of employment and income to be eligible for this form of borrowing.

Payday loans are ideal when you need quick cash to handle an emergency or an unexpected expenditure and need liquidity to cover you till payday.

Banks loans

If you have been a long standing customer with your bank and have exceptional credit records, you can avail unsecured loans from the financial institution at reasonable rates. The plus point here is that the money is easily transferred to your account in the bank as soon as the loan is approved and you do not have to pay exorbitant interests. However, this type of funding can be extremely hard to procure with most banks shying away from risky lending.

Private financing establishments

There are also boutique financial firms that offer unsecured loan products which are tailored to meet the specific requirements of the borrower. The advantage of such a loan is that the borrowing limit can exceed $250,000 where the customers needs can be justified and as long as the individual has the means to repay the loan.

However, like most other forms of unsecured lending, interest rates are very high and the underwriting standards while humane, may not be suitable for many people.

P2P lending

P2P lending Prosper P2P loans are a fairly recent trend in the financial market; however, it has managed to garner a lot of attention.

There are online financing communities such as Prosper where an individual can post his requirements and get an answer from a group of investors who are open to the prospect of lending him/her the required amount.

The only hurdle here is the outlandish interest rate levied on people who have a FICO score below 600; you will be shocked to find unrealistic rates of 34% or more.

Where and how to find and apply for unsecured loans?

The internet is clearly a more suitable arena for borrowers looking for unsecured financing. However, it is crucial to understand that there are many fly by night operators who will have no qualms about making a few quick bucks at your expense.

These scamsters will usually charge you a huge amount of money in processing fees but the principal will not be forthcoming. So, here is a look at how you can find a genuine and reliable lender.

Have a clear understanding of your requirements

To begin with, you will need to have a clear understanding about the amount of money that you need and the installments that you can realistically pay. While your needs may supersede what you are eligible for; borrowing more than you can repay will further mar your credit rating and will be a classic case of out of the fire and into the frying pan.

Search online

Once you know what you are looking for, it is simply a matter of using a search engine to find a list of lenders. However, it is vital to check the terms of the lender and feedback on the establishments before picking a firm for your requirements.

Make a list of the most feasible offers

unsecured loans Draw up a list of lenders who you think are suitable for your specific needs and write down their terms and conditions along with the interest rates, maximum lending amount, repayment structure etc, so that you can compare various establishments.

Check their credentials

Make it a point to consult the Better Business Bureau website before taking a call on the lender that you intend to approach. Also, check out various forums for the feedback on various lending establishments.

Ask for quotes

Finally, talk to the top five lenders on your list and ask for quotes; you do not want to offer any personal information at this point; simply get a feel for what is available.

Get your documents ready

Depending on the type of loan that you apply for, you will need to keep certain documents ready including proof of income and employment etc. You may also need a guarantor who will be able to cosign your loan.

Important Things To Remember before Applying for an Unsecured Loan

While the interest on secured loans is tax deductible, you do not get the same consideration from the IRS in case of unsecured borrowings.
When mulling over the possibility of an unsecured loan for consolidation; it imperative to ensure that the interest rate that you pay on the unsecured loan should not be more than the cumulative rate of your existing debts.
If you are not sure about the amount of money that you need to borrow, work with the lender to determine the precise amount of money that you can pay in monthly installments without falling back. It is crucial to understand that your credit rating can take a big hit if you default on such a loan.
Since unsecured loans typically come with a higher price tag, the interest rate can quickly make it cumbersome to pay the entire amount of money that you owe, so you should try and repay an unsecured loan at the earliest.