What is an Unsecured Loan?
An unsecured loan provides unsecured credit for anyone who needs to pay for an expense over time. The debt instrument is available to individuals or businesses and is approved based on the borrower’s credit score. This distinguishes unsecured loans from secured loans, which are “secured” with collateral, such as a house or car.
Unsecured and Secured Loans: The Major Difference
The interest rate on a secured loan is lower than an unsecured loan, as the lender can recoup the payment by seizing the collateral secured for financing. Therefore, you need to be sure about repayment if you take out secured financing. If you default on the loan, your home or car could be seized.
Types of Unsecured Loans
Unsecured personal loans typically cover the expenses covered by student loans or for various personal loans or business financing. Types of unsecured personal loans include:
- Education/student loans used to pay for a student’s tuition
- Computer loans to buy electronics
- Debt consolidation loans to reduce or eliminate credit card debt
- Wedding loans
- Loans used to finance and adopt a pet
- Loans that cover medical expenses
- Bad credit loans to cover personal loans – needed for scores lower than 620
- Loans to pay for emergency repairs
- Loans used to catch up on utility payments
- Loans used to finance a cruise or vacation
- Business loans used to replenish a company’s inventory
As you can see, unsecured loans meet the needs of various borrowers.
Where Can You Get an Unsecured Loan?
You can obtain an unsecured loan online or from a major financial institution. If you have had some credit problems, you will find that you can obtain an unsecured loan more easily online. Typically, banks and credit unions require borrowers to have good to excellent credit scores.
Once the lender evaluates the borrower’s creditworthiness and debt-to-inventory (DTI) information and approves the funding, they can transmit the money without the pledge of an asset. That is why the approval of an unsecured loan is primarily based on the borrower’s credit score.
What You Will Need to Apply for Unsecured Loans Online
To apply for unsecured loans, borrowers need to review their credit reports from the 2 main credit reporting agencies, Equifax and TransUnion. You can get free reports once per year from each of these bureaus.
It is essential to read both reports, as lenders base their decisions on two histories. So, you need to see what each report says. Also, by reviewing your credit reports, you can remove any inaccuracies from the paperwork – errors that can negatively impact your score.
Disputing Credit Report Errors
A dispute of an error on a credit report typically takes about 30 days to resolve. This is because both the credit bureau and creditor that supplied the credit details must correct the wrong on a credit report. To proceed with a dispute, you need to explain, in writing, what you believe is wrong and use the credit bureau’s dispute document, if they have one. Add copies of the paperwork that support your dispute and be sure to keep records of everything sent.
The credit bureau must respond to the dispute within 30 days. They may ask for additional proof to investigate your claim. The credit bureau then forwards your letter and evidence to the company that reported the information. The company, in turn, will report its findings to the bureau, which will get back to you before the allotted 30 days. The credit bureau must give you written results of its findings. If a change is made, you will receive a free copy of your credit report. This free report is an addition to the free yearly report you can receive.
During the process, the credit bureau must also send a notice to anyone who received a report for employment purposes during the previous two years if you make the request. If the dispute is not resolved, you have the right to ask that a statement of the disagreement be added to your file. You can also request that the dispute information be sent to anyone asking for your report. A fee is typically charged for the request.
What to Include in the Dispute Letter and Report
When drafting the dispute letter, you should include your name and address and the details about the inaccuracy. Then, contact the business that supplied the information to find out where to send a copy of your dispute. Knowing what your credit report says is important to get the lowest rate possible on an unsecured loan. As noted, creditworthiness plays heavily in the approval for an unsecured loan. This can also be helpful if you apply for an unsecured line of credit.
Examples of Unsecured Credit and Loans
One of the best examples of unsecured loans is a revolving loan, such as a credit card. As the name suggests, you can take out the loan, pay it back, and take money out again, as needed. Besides credit cards, you can also use a personal unsecured line of credit, as indicated, for short-term funding needs.
A term loan represents an unsecured loan where the proceeds for the financing are provided in a lump sum before repayment. The term may be paid bi-weekly or monthly, or during periodic intervals. Payments include the principal and interest. This same type of loan can be used for a secured loan.
This type of unsecured loan allows a borrower to pool their outstanding debts together into a single loan. The debts may include utility bills, phone bills, and credit cards. He or she can then pay off all the bills with the loan. The consolidated loan is then paid back like a term loan. However, the borrower can pay back the amount at a lower interest rate more easily.
Qualifying for an Unsecured Loan
Because you do not pledge an asset for collateral, you need to have a higher credit score when you apply for unsecured funding. The lender will therefore consider the following factors when reviewing your loan application:
- Credit history
- Income from employment (Is it steady?)
- Past habits of debt repayment
Getting Someone to Cosign the Loan Application
Suppose you have had problems with a debit or feel nervous about applying for unsecured loans online. In that case, you can alleviate much of the tension by adding a cosigner to the loan application. A cosigner should have a regular income and a good credit score and history.
While a cosigner does not make your payments for you, they agree to cover your back if you have problems with repayment. If this becomes an issue, a cosigner agrees to step in and repay the balance. Having a cosigner almost guarantees approval regardless of your credit score. Not only does having a cosigner reduce the risk for the lender, but it also ensures that you can maintain your credit score if you have payment problems.
Your credit score and proof of income both factor significantly in receiving loan funding, especially if you cannot get a cosigner for the loan. A steady and predictable income stream will help you greatly when applying for unsecured loans.
Tips When Applying for Unsecured Loans
When you apply for unsecured personal loans or unsecured business loans, you need to look for the following:
- The lender should specialize in the loan you seek (debt consolidation, emergency cash, student funding, etc.)
- Obtain a loan for the lowest rate possible even if you apply for unsecured personal loans for bad credit.
- When reading the fine print, ensure that the loan does not have any hidden fees or penalizes you for paying off the loan early.
What Happens if an Unsecured Loan Cannot Be Repaid?
If you cannot repay an unsecured loan, the lender may be able to garnish your wages to get the money for non-payment. Or, a lien could be placed on one of your assets in rare instances. Normally, lenders will send the unpaid balance to a collection agency for collection. This action will reflect poorly on your credit report.
Frequently asked questions
What are examples of unsecured loans?
Unsecured loans may include credit cards, student loans, or personal loans for just about any reason. The loans are a higher risk for lenders, as they are not secured with an asset.
What questions should you ask when you apply for unsecured loans online?
Ask the following questions when reviewing unsecured loans online?
- What is an amount I can borrow and repay?
- How long will it take to get the money or have it electronically transferred into my account? (Usually it takes no more than 48 hours)
- What documents or information do I need to take out unsecured loans (Normally, you will need a current I.D., proof of income (such as pay stubs or an income statement), your contact name and address and proof of residence, proof of employment, and a contact address and phone for your employer.)
- What is my current credit score? (You can get one free credit report annually from Equifax and TransUnion.)
- What is the loan term? (Most unsecured loans run from 12 to 36 months).
- Should I apply for an unsecured line of credit or get a lump sum from one of the featured unsecured personal loans? (A line of credit may work out better for you if you plan to use it for your business or to make home improvements.)
- What is the annual percentage rate (APR) assessed for the loan?
- What are the loan fees? (Read the fine print. Make sure you know what to expect. For example, if you are charged an origination fee, that expense will be taken out of the loan proceeds.)
- Will the loan require a co-signer? (You need to find a reliable family member or friend to cosign for the loan if you need the money and have had a past problem with payments.)
- What is the reputation of the lender? (Read the reviews of lenders online and check the Better Business Bureau (BBB) rating.
Is there a specific threshold where it becomes difficult to get approved for an unsecured loan?
Normally, you can get an unsecured loan, without the need for a cosigner, if you have a credit score of at least 600. If your credit score is under this number, you may need to get a cosigner or wait to get funding until you can raise the score.
How does the loan repayment work?
The repayment plan for unsecured loans will affect your daily finances. Therefore, it should be set at a rate you can manage without worrying about missing a payment. The amount you spend monthly will depend on the total amount of the loan, the loan term, and the APR. Make sure you know the monthly due date and when the payments will begin. Ask the lender if you will get penalized for paying off the financing early. Ideally, you should take out a loan with no prepayment penalties.
You can get a lot of mileage out of financing you receive from one of the unsecured loans featured online. Make sure you know your credit score and read your credit report first to obtain the best loan rate. If you have any errors on your report, they will need to be corrected first.
If you stay within your budget, you can use the money you receive from an unsecured loan to add to your quality of life and build your credit over time. Therefore, make sure you can repay the proceeds. If you have had past credit problems, get a co-signer to help you, just in case you should you find it difficult, at some point, to repay the loan amount.