Unsecured personal loans are considered installment loans. This means you can borrow a certain amount of money for any purpose and make fixed monthly repayments with interest.
Unsecured and Secured Personal Loans: How Are They Different?
The major difference between unsecured and secured personal loans is the need for collateral. The former don't require you to pledge an asset as collateral, while the latter will need you to do so. These loans also differ in total loan costs, application process, loan terms, and requirements.
The annual percentage rate (APR) of secured personal loans is lower than that of unsecured personal loans. This is because there's less risk on the lender’s part. If the borrower defaults on the loan, the lender can repossess whatever the borrower pledged as collateral.
Are you thinking of getting an unsecured personal loan? There are many credible lenders, like CreditNinja, that can help you get a low APR.
How To Qualify For An Unsecured Personal Loan
Lenders want to be sure of your ability to make on-time repayments. So they evaluate the following factors before approving your application:
Credit scores help predict your likelihood of paying back a loan. Also, you can qualify for a higher loan amount (with low interest) if you have an excellent credit score. However, a poor credit score will give you the opposite.
Your income can also help lenders measure the risk of lending you money. If you make enough money, the lenders will most likely approve your application.
The debt-to-income ratio compares your income with your monthly debts. Lenders use this ratio to evaluate your ability to handle a new loan. So the lower your debt-to-income ratio, the better your chances of getting approved.
Advantages Of Taking Out An Unsecured Personal Loan
Unsecured personal loans are known for not requiring collateral. But there's more to this loan type. Below are some advantages of unsecured personal loans:
Unsecured personal loans can be used to pay for different types of expenses, like unexpected repairs and major purchases;
This type of loan typically comes with fixed monthly payments and interest rates, making it easy for you to manage your debts;
Lenders of unsecured personal loans tend to offer flexible repayment terms. These terms usually range from 12 to 84 months. So you have the freedom to pick out the repayment period that works best for you;
When it comes to unsecured personal loans, you can choose from various loan amounts. The range may start from $1,500 all the way up to$100,000 or even larger.
Watch Out For These Factors
Many will choose to get an unsecured personal loan. However, there are some vital things you'll need to watch out for:
As mentioned earlier, unsecured personal loans tend to have higher interest rates compared to secured personal loans because of the risk they portend to lenders. If you default on the loan, they have no assets to repossess. So they charge a higher interest rate to make up for the lack of collateral.
Some lenders charge origination fees. These fees are the cost of processing the loan application. They are usually around 1 to 6 percent of your loan amount.
Some lenders charge prepayment penalties, which are penalty fees for paying your loan before the due date. However, with some lenders, paying your loan earlier than schedule can help you save cash on interest rates. So it'd help to know if your lender slams prepayment penalties.
To Wrap It Up
Unsecured loans are a great way to get the funds you need. However, since they require no collateral, interest rates are often higher than that of secured personal loans. So it'd be best to critically evaluate your needs and current financial situation before deciding to take out an unsecured personal loan.