If you got caught up in a tight financial situation, there are various types of loans at your back. In choosing loan programs, you have to think about the reason why you want to borrow money. However, if you need money for a lot of things, good thing personal loans exist! They are being offered by banks, credit corporations, financial institutions, and even private lenders.
Personal loans allow you to borrow money for general purposes – home improvement, car insurance, out of town vacation or payment for existing debt. However, personal loans are more difficult to be approved. It often has stricter requirements.
Personal loans are unsecured. It does not require the borrower to present any asset or property as collateral. That is why only a few applicants are granted personal loans because if the borrower defaults, nothing can be taken to replace the money.
Instead, credit is the key to get your personal loan application approved. If you have a good credit, then you can be granted a personal loan with lower interest rates and more payment term options. With bad credit, it’s either you are asked for specific requirements like a co-signer or personal guarantee, or you’re simple rejected.
Types of Unsecured Loan
If you want to apply for a personal loan, you can choose among different types of unsecured loan. Despite its flexibility to purpose, you should also learn about the nature and terms of each type of unsecured loan.
A credit card is the most popular way to borrow money. Basically, you are borrowing money from the credit card company. Unlike other loans, a credit card cannot provide you the lump sum of the money you want to borrow, instead, you can use the credit card to pay your purchases anytime and anywhere. If you need more money later, you can use your credit card again, even above your credit limit.
Credit cards are popular because it makes borrowing money convenient. However, the interest rates for credit cards are quite high. Also, you have to be cautious of your purchases. In some cases, most of the errors in credit reports are caused by credit card purchases.
Signature loans are approved once you sign an agreement that states you will pay this amount of money within this particular term. Signature loans often have lower interest rates and are attractive for first-time borrowers.
Payday loans are convenient because lenders allow you to borrow money until your next paycheck. However, they usually come with higher transaction fees and interest rates up to 400%.
Line of Credit
The line of credit is issued by a financial institution. They basically limit the amount of money that you want to borrow. To apply for this, you have to be a member of that financial institution.
Cash advance is applicable for credit card account holders. Cash advance comes in two forms. You can advance a cash based on your income or based on your credit limit. Cash advances have higher interest rates and require shorter repayment periods.
Some student loans can fall into this category. Some organizations, especially the private lenders offer fixed amount, fixed interest rates and fixed repayment plans for student loans. Plus, you can enjoy a grace period before you start the repayment. Luckily, student loans do not require a credit history.
Peer-to-Peer Loans usually rely on the integrity of the borrowers. Basically, borrowers can demand an amount of money to borrow. Then, a lender will approve the request of the borrower. If no lender agrees, then the borrower has to lower his or her request.
Apart from these loans, other unsecured loans include small business loans and term loans that are offered by financial institutions as well.
When will I choose an unsecured loan?
If you do not want to apply for a secured loan, then your next choice will be the unsecured loan. Unsecured loans have fixed amount of loan principal that you can borrow. It ranges from $1,000 to $50,000 or higher on sites like Loans.no. It can also depend on your credit rating.
Unsecured personal loans usually have a fixed interest rate and are generally lower than any other types of loan. If you also have a good credit score, then the interest rate will decrease more. In this case, you do not have to worry about interest rates that fluctuate over time.
Unsecured loans also have a fixed repayment period. Usually, you can pay the loan in 12, 24, 36, 48, and 60 months. Longer repayment term means a lower monthly amount of repayment. But it also means more interest than shorter terms.
Moreover, choose an unsecured loan if you want immediate cash for emergency needs such as medical costs, school fees or utility bills.
And lastly, if you do not want to risk your valuable assets and properties, then opt for an unsecured loan.
What if I have a bad credit?
Having a bad credit doesn’t automatically void you to get an unsecured loan. However, it will really be difficult as you can see here.
Your first try involves a co-signer. A co-signer will be 100% responsible for your loan. Thus, it will be a big risk for your co-signer. Plus, the borrowing power of your co-signer will also be affected, until you fully paid your loan.
Second, you have to determine what’s keeping your credit in a bad rating. Check if there are some errors in your credit report. Secure a free copy of the report from credit bureaus. If you can identify any errors, dispute them to the credit bureaus. They will be the ones to investigate and correct the errors.
However, if none of the two works, then wait until you can build up your credit before you can get an unsecured loan.
What happens when I default?
When the borrower defaults, the lender cannot repossess any asset or property as unsecured loans do not require any collateral. In this case, the lender will commission a collection agency to collect the debt or take the borrower to the court. If the court favors the side of the lender, then the borrower will have to pay the debt or the wages will be increased.