Loans » Personal Loans » What Is Unsecured Loan And How To Get One
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What Is Unsecured Loan And How To Get One

Unsecured personal loans is a great option if you need quick money. However, you'll pay high interest rate, especially if you have poor credit. How does it work and where can you get an unsecured loan?
Author: Russell White
Russell White

Writer, Contributor

Experience

As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.
Author: Russell White
Russell White

Writer, Contributor

Experience

As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Transparency is a core value for us, see how we make money.

Table Of Content

Personal loans are considered one of the most convenient methods of finance. This is reflected in the outstanding personal loan balances in the US. In this chart compiled with data from TransUnion and The Wall Street Journal, you can see that over the last decade the outstanding balances have increased from $49 billion in 2010 to $156 billion in 2019. Apart from a dip in 2011, there has been a steady upward trend.

Outstanding Personal Loan Balances in the U.S. ($ Billions)

What Are Unsecured Loans?

Unsecured loans, also known as personal loans, usually can be used for general use such as debt consolidation, home improvement, or emergencies expenses.

Unsecured loans require a short – mid repayment period , coupled with higher interest rates. Also, unsecured loans favor borrowers with higher credit scores and those with a cosigner.  Unsecured loans tend to be quicker to obtain. There is no need for the lender to appraise a home or other security to finalize the loan. So, the lender simply looks at your finances to determine if you qualify.

Here is a list of names to identify this category of loans:

  • Signature Loans
  • Personal Loans
  • Debt-Consolidation Loans
  • Unsecured Personal Loans
  • Installment Loans

The loans mentioned above are very similar to one another.

How Much Can I Borrow on an Unsecured Loan? 

Most lenders in the United States can lend you an unsecured loan from $5,000 to $50,000. The amount may depend on several factors such as the reason for securing the loan. For example, unsecured auto loans or home improvement can carry more weight than a loan to buy a student computer. Therefore, it is convenient to check this information with your preferred lender.

You should expect to pay an annual percentage rate (APR) between 6% – 36% depending on the lender and the purpose of the loan. Also, the term of the loan can extend between 2-year to a max of 7-years.

Who Should get an Unsecured Loan?

When it comes to an unsecured loan, anyone who meets the minimum requirements stipulated by the lender can get the loan. You must also be comfortable with the terms and the conditions of the lender. That means you have the required minimum credit record, you can be able to repay the loan within the stated period, and the interest rates are within your reach.

Another reason you might want to get this type of loan is when you consider the speed of getting the funds, and it is the only option available. Since the processing time is within a day or even in hours, and with minimum requirements, it can be convenient when you have an emergency.

Main Features Of Unsecured Loans

The interest rates you receive are evaluated by your credit score and history.
The lenders determine your eligibility by your credit history. They check your debt ratio and your income to determine whether or not you are qualified. People with low credit scores have lower interest rates with a maximum annual percentage rate of 36 %. This rate is considered cost-effective according to those in legislation and other experts.

  • No need for collateral – This is why the loan is referred to as an “unsecured” loan. Lenders can report you to the credit bureaus if you don't make payments on time. They can also send your payments to collections and sue you for not paying off the debt. Lenders do not have the legal access to take your property. On the other hand, lenders can use secured loans to confiscate things such as vehicles.
  • No expectations – You have complete control over how you spend your money. The rate that is offered is typically the same regardless of the amount of money you decide to use. In rare cases, there are exceptions: lenders charge higher interest rates on a loan that is used for debt consolidation, versus loans being used for vacations, such as a beach cruise.
  • Loans for personal use are recorded on your credit report  – As you're making payments on your loan, expect that the lender will send monthly reports to either of the 3 credit bureaus. They will also report late payments. When you pay your installment loans on time, doing so will reflect a positive change on your credit score. The credit score algorithms will review both installment debts, such as personal loans, and revolving debts, such as credit cards and personal lines of credit.

How Much Can I Borrow on an Unsecured Loan? 

Most lenders in the United States can lend you an unsecured loan from $5,000 to $50,000. The amount may depend on several factors such as the reason for securing the loan. For example, unsecured auto loans or home improvement can carry more weight than a loan to buy a student computer. Therefore, it is convenient to check this information with your preferred lender.

You should expect to pay an annual percentage rate (APR) between 6% – 36% depending on the lender and the purpose of the loan. Also, the term of the loan can extend between 2-year to a max of 7-years.

Who Should get an Unsecured Loan?

When it comes to an unsecured loan, anyone who meets the minimum requirements stipulated by the lender can get the loan. You must also be comfortable with the terms and the conditions of the lender. That means you have the required minimum credit record, you can be able to repay the loan within the stated period, and the interest rates are within your reach.

Another reason you might want to get this type of loan is when you consider the speed of getting the funds, and it is the only option available. Since the processing time is within a day or even in hours, and with minimum requirements, it can be convenient when you have an emergency.

Main Features Of Unsecured Loans

The interest rates you receive are evaluated by your credit score and history.
The lenders determine your eligibility by your credit history. They check your debt ratio and your income to determine whether or not you are qualified. People with low credit scores have lower interest rates with a maximum annual percentage rate of 36 %. This rate is considered cost-effective according to those in legislation and other experts.

  • No need for collateral – This is why the loan is referred to as an “unsecured” loan. Lenders can report you to the credit bureaus if you don't make payments on time. They can also send your payments to collections and sue you for not paying off the debt. Lenders do not have the legal access to take your property. On the other hand, lenders can use secured loans to confiscate things such as vehicles.
  • No expectations – You have complete control over how you spend your money. The rate that is offered is typically the same regardless of the amount of money you decide to use. In rare cases, there are exceptions: lenders charge higher interest rates on a loan that is used for debt consolidation, versus loans being used for vacations, such as a beach cruise.
  • Loans for personal use are recorded on your credit report  – As you're making payments on your loan, expect that the lender will send monthly reports to either of the 3 credit bureaus. They will also report late payments. When you pay your installment loans on time, doing so will reflect a positive change on your credit score. The credit score algorithms will review both installment debts, such as personal loans, and revolving debts, such as credit cards and personal lines of credit.

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How Much Does It Cost?

The total cost of your loan depends on 3 main factors: interest rate, term and fees. Interest rate is a pre determined factor that set by your lender, depends on your credit score. The loan term has a great effect on your interest payment – the longer the term, the higher your interest payment.

There are a number of factors that influence personal loan APRs. One of the factors with the most weight is credit score. If you have a lower credit score, you represent a greater risk to the lender and this is reflected in the rate. In this chart compiled with LendingTree customer data, you can see that those with a 720+ credit score pay an average of 7.63%. At the other end of the scale, those with a poor credit rating of less than 560, the rate shoots up to an eye watering 113%.

Personal Loan Average APR by Credit Score

Lastly – some lenders require different types of fees such as origination fees. Fee is a flexible factors, so it's recommended to negotiate for a lower fee, especially if you have good credit score.

1. Interest Rate

When it comes to paying interest on a personal loan, there are only two options, and there’s no way to maneuver around it. Choosing between a fixed or variable rate all comes down to your personal desire.

Listed below are the pros and cons of both types:

  • Fixed Rate

Having a fixed rate means that the rate doesn't change over the span of the personal loan; it’s locked and a done deal.

  • Don’t have to worry about a rate increase.
  • The amount to be paid per month doesn't change making it easier to plan financially.
  • Fees and rates are higher than variable personal loan rates.
  • If there are lower interest rates, you can’t change it.
  • You can start paying ahead, but there could be some additional charges.
  • Variable Rate

With this type of loan, rates can change at any given time. Your minimum payment may be different per month depending on how the interest increases or decreases.

  • You’ll get lower rates and fees in comparison to having a fixed interest rate.
  • When interest in the market goes down, that means your payments will go down as well.
  • Due to fluctuations in interest rates, it’s hard to budget and plan accordingly.
  • If interest rates increase, so will your minimum monthly payment (read how changes in interest rate impact on your investments).

2. Term

The cost of the loan will also be affected by the length of the loan. The interest you pay will increase the longer you make payments. Generally, a shorter term means that your monthly bill will be higher but that you will pay less over the long-term.

Online calculators can help you determine the amount that you owe each month.

3. Fees

Finally, some fees might raise the cost. While some lenders will require that you pay a quick percentage back, others may charge an annual fee. There will be different fees between lenders so make sure you are aware of the possible penalties and fees associated with your loan.

Origination fees are a one-time, upfront fee that your lender adds to your loan to cover administration and processing costs.  It's usually between 1% and 5%, but sometimes it's charged as a flat-rate fee. For example, if you took out a loan for $10,000 and there was a 4% origination fee, you would only receive 9,600 when you got your funds. Your lender would get $400 of the loan off the top, and you'd still have to pay back the full $10,000 plus interest.

How to Calculate Your Interest?

Most lenders calculate unsecured loan interest using an amortization formula. First, you must know the number of payments you will make, the loan interest, your fixed monthly payment amount, and the principal amount.

Your working formula will be your interest rate divided by the number of payments multiplied by the reducing principal amount (loan balance).

unsecured loan interest calculation

For example, assume that you borrowed $50,000 at 8% interest for a repayment period of 12 months, and you have a fixed repayment of $4,167.

In the first month, you will pay 0.08/12 X $50,000= $333.33. The second month will be 50,000 – (fixed repayment (4167) + interest rate (333.33)) * 0.08/12, which will be 303.33. This will continue till the last month of your repayment period.

What Happens if you Can't Pay Your Unsecured Loan?

If you fail to pay your unsecured loan, the first few late payments often lead to an increase in interest rates, adding penalty fees, and prompting the lender to send a notification. If the loan is overdue by 30 days, after a pursuit with no progress, the lender will assume you are on the verge of defaulting. At this stage, if you fail to cooperate, the lender may declare you as a defaulter and send your report to a credit agency.

They also have the right to send your account for collection or even file a lawsuit to collect the debt owed. Your credit score will also take a hit, you could lose several points.  A lender could also put a lien on your house or other valuable assets. The default could also cause a drop in credit scores and may remain on your credit report for up to seven years.

Things to Consider Before Applying 

Before you apply for a personal loans, make sure you have a good credit rating.

  • Find out if you can make payments

Are you able to make your monthly payments on schedule? It is important to know that if you are unable to make your monthly payments on time, your credit score will be affected. One missed payment can cause your credit score to drop by 100 points.

Imagine what it would be like if you were to miss more.

  • Only take loans if you really need them

Do you need to take out a loan or can you open a new savings account? You won't want to take out debt for short-term expenses, however.

Although many people take out loans to pay for weddings, this is not always the best option. Home remodeling and other home improvement projects are great cases for loans. You are increasing the value of your living space.

  • Apply in Person or Online

You can apply online or in person. This will depend on whether you prefer to speak with a bank representative or read more about the loan. Additionally, there are many benefits to staying home, as online lenders are faster when it comes to payments.

A personal loan can be used for almost anything. It is important to ensure that you are able to repay the loan once it has begun.

Final Words

Choosing the best loan for the task at hand is important. In addition, choosing the wrong loan could pose a financial risk with hidden fees to address. Consider going to a finance expert to make sure that you are making the best decision possible when applying for a personal loan if you are hesitant. If you decide to apply for our unsecured personal loan, you don't need any valuable resources to do so.

Moreover, terms and conditions do apply; they are available upon request. New terms and conditions can be presented in the future as well. Credit or loan applications will be subject to the decision of the bank.

FAQs

Typically, if a debtor defaults on paying the unsecured loan, the lender has the right to take legal action against them. First, they can decide to sell the debt to a collector. The debt agency will typically file a lawsuit against the defaulter to collect the amount owing. Often, it ends in a tug-of-war between the debt collector and the defaulter. 

Besides, the lender will report the default to credit reporting agencies. The action will knock off points from your FICO credit rating. Usually, this is an effort to coerce the defaulter into paying their debt on time.

When you are borrowing an unsecured loan for your home improvement, you are getting a personal loan that does not require collateral attached to it. Generally, this loan is different from home equity loans like HELOCs, where the lender necessitates the borrower to have accumulated a specific amount of home equity.

If you are looking for a more extended repayment period, you will have to go with one of the equity loans. In addition, the interest rates are often high, and you must have a reputable credit record to get a better interest rate.

Typically, banks will want all their loans secure and backed by collateral to hedge them against defaulters. But not everyone can afford to back up their loan with an asset. Therefore, the tough economic times have also forced banks to adapt and be competitive by attending to all types of clients. 

However, unlike secured loans such as mortgages or car loans, banks place limits on the maximum you can borrow. Also, these types of loans require a shorter repayment period, coupled with higher interest rates. Also, unsecured loans favor borrowers with higher credit scores and those with a cosigner. 

Unsecured loans are considered riskier by lenders than secured loans. Because there is no collateral for the loan, it is more difficult for the lender to recoup the debt if you default. As a result, unsecured loans typically have higher interest rates than secured loans.

Unsecured loans, on the other hand, are typically easier to obtain. To finalize the loan, the lender does not need to appraise a home or other security. As a result, the lender simply examines your financial situation to see if you qualify.

Your credit is affected by both secured and unsecured loans. While your credit score may initially suffer as a result of the hard pull during the application process, if you properly manage your loan account, it can actually help your credit.

Every monthly loan payment you make is reported to the credit bureaus. Similarly, if you fail to make a payment or make it late, it will be noted on your file. As a result, if you consistently make your payments on time, your credit will benefit.

Compare Personal Loan With Our Partners

Credible

  • Get a personalized rate quickly
  • Variety of lenders
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Bankrate

  • Get prequalified loan offers
  • 2 minutes or less
  • NOT affect your credit score

Personalloans.com

  • $1,000 to $35,000
  • Get funding fast
  • No hidden fees

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The product offers that appear on this site are from companies from which this website receives compensation. 

Best Rate Guarantee – $200 giftcard if you find and close with a better rate elsewhere (Terms Apply)

Advertiser Disclosure

The product offers that appear on this site are from companies from which this website receives compensation. 

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