Understanding Unsecured Personal Loans: A Guide for Beginners
Are you ready to learn what an unsecured personal loan is? We’re here for you with all the need-to-know details.
Get informed on how this type of loan works, its advantages and drawbacks, what’s needed to qualify – and an easy application process. Keep reading!
How do unsecured personal loans work?
An unsecured personal loan is a type of loan that doesn’t require any collateral, such as property or a vehicle.
It means that if the borrower fails to make their loan repayments, the lender won’t be able to take your assets as compensation.
Instead, they can take legal action against you to recover the money they lent you plus interest.
The main benefit of taking out an unsecured personal loan is that there are usually no upfront costs.
Then borrowers don’t have to worry about paying for expensive appraisals or security deposits when applying for an unsecured loan.
What is the difference between a secured and an unsecured loan?
Secured loans are backed by some collateral, such as a home or car, that the lender can seize if the borrower fails to repay the loan.
On the other hand, unsecured loans don’t require any collateral. Therefore, it may be riskier for the lender.
How to use an unsecured personal loan?
Unsecured personal loans are good for short-term financial needs such as:
- Consolidating debt;
- Making a large purchase;
- Home improvements;
- Medical bills;
- Auto.
However, you can also use them for longer-term goals, such as starting a business or investing in real estate.
Regardless of why you need an unsecured personal loan, it’s important to use it responsibly and fully understand the terms and conditions.
The pros and cons of using an unsecured personal loan
As with any financial product, unsecured personal loans offer benefits and drawbacks to their borrowers. Compare the pros and cons below!
Pros
- They are easier to obtain than secured loans;
- Typically come with lower interest rates than credit cards;
- Borrowers can use them for several purposes, including debt consolidation, home repairs, and medical expenses;
- They offer a fixed repayment schedule, which can help you budget your money more effectively;
- Borrowers with better credit scores can qualify for lower rates.
Cons
- Higher interest than secured loans because it is riskier for lenders;
- If you don’t pay on time, it can negatively affect your credit score.
How do you qualify for an unsecured personal loan?
Qualifying for an unsecured personal loan will depend on several factors, including:
- Credit score;
- Income level;
- Residency;
- Existing debt obligations;
- Age.
Generally speaking, lenders prefer borrowers with good credit scores (above 700), steady income sources (such as employment), and minimal outstanding debts (ideally under a 30% utilization rate).
Additionally, some lenders may require proof of residence or other documents before approving a loan application.
But some unsecured personal loans focus on bad scores, either.
How to apply for an unsecured personal loan?
Applying for an unsecured personal loan typically involves filling out a simple online form with basic information.
Many personal loan platforms connect borrowers to lenders and start the application process.
For that, you must provide your personal information, including name, address, phone number, etc.
Also, uploading necessary documents such as bank statements or pay stubs depends on the lender’s requirements.
After approval has been granted, funds can usually be deposited into your bank account within 1-2 business days, depending on the lender’s processing timescales.
Alternatives to unsecured personal loans
Several alternatives may work better for you if you don’t want to apply for an unsecured personal loan.
Let’s look at four options to help you get the money you need without taking out an unsecured personal loan.
1. Line of Credit
A personal line of credit is a loan available to you, usually up to a certain amount, which you can access as needed.
It’s like having a cash reserve available, which you can use for whatever purpose.
It is different from a traditional loan because there is no set repayment schedule. You can borrow money as needed and repay it over time (usually within a few months to a year).
This flexibility makes it a great option for people who need funds occasionally or don’t want the burden of making monthly payments.
2. Credit Card
Secondly, using a credit card can be a good alternative to an unsecured loan in some cases.
You might be able to find one with no annual fee and a 0% introductory APR so that you can make purchases and pay off the balance over time without accruing any interest charges.
Make sure you plan to pay it off before the introductory period ends, or else you could pay more interest than if you had taken out an unsecured personal loan.
3. Salary Advance
Some employers offer salary advances for employees who need quick cash to cover unexpected expenses or bills.
With this type of advance, your employer will typically provide you with access to some of your unpaid wages before payday rolls around.
There’s no need for any formal application process (or credit check) like there would be with an unsecured personal loan.
However, remember that this type of advance should not be used as a long-term solution since it must be paid back from future wages – usually within one month or less.
4. Peer-to-peer loans
Finally, a peer-to-peer loan is made from one individual to another without using a financial institution as an intermediary.
Peer-to-peer loans can be used for various purposes, including consolidating debt, funding a small business, or making a large purchase.
The process of obtaining a peer-to-peer loan is relatively simple. The borrower completes an application, and the platform’s underwriters review the application.
The funds are transferred to the borrower’s bank account if the loan is approved. Peer-to-peer loans offer borrowers lower rates and longer terms than traditional bank loans.
Bottom Line
Given all of this information, it’s clear that understanding unsecured can open many doors for times of financial burden.
Then you can borrow money for emergencies or give that old project a fresh start, but now be aware of how it works and how much it’ll cost you on the way. Thanks for reading!
