An unsecured loan is just that – a loan to you that is not secured by any property. This is in contrast to secured loans that are backed by an asset. For example, a car loan secured by the car is a secured loan. If you are late making the payments, they take back the car. Your home loan is a secured loan. If you don’t make the payments, at some point, they kick you out of the house and sell it to someone else. Secured loans tend to have a lower interest rate than unsecured loans, because the ability to seize the underlying asset reduces the risk, they lose money on the deal. Businesses try to manage the risk associated with personal loans by basing the interest rate on your reputation. That’s the reason why they check your credit score and verify your income.
What is an unsecured personal loan? It is an unsecured loan made to you personally instead of a business or organization. You are personally responsible for repaying it.
What are the benefits of an unsecured personal loan?
An unsecured loan isn’t backed by any assets you own. If you’re late with a payment, you don’t lose the collateral because there is none. Unlike a payday loan, you don’t have to pay back the whole amount with your next paycheck. You can stretch out payments over several weeks or months. You can shop around for the best loan rates and favorable loan terms.
What should you look for in an unsecured personal loan?
What should you look for in an unsecured loan? We’ll cover the biggest factors you need to consider. We’ll also explain why these factors are the most important ones.
One of the first things you need to do when comparing unsecured personal loans online is making sure the lender is legitimate. You can’t afford to give your name, address, Social Security number and bank account to scammers posing as lenders.
Verify that the business is legitimate. Look for a valid address associated with that business name. A post office box isn’t good enough, while a location in a strip center or private residence is a major red flag. Make sure they’re licensed and licensed in your state. Search based on the license number and verify that it is associated with that business name. Then you don’t end up giving your information to a scammer posing as a lender using stolen information. If they ask for unnecessary information, this is a red flag. For example, an online lender shouldn’t ask for a third party’s information. They can ask about your employer, but they shouldn’t ask for family member’s personal information. It isn’t for collection purposes, since it is illegal for them to harass your parents about your late loan payments.
If the website doesn’t have secure HTTP or triggers warnings with your antivirus, don’t enter your personal information into the site. Even if the lender is legitimate, this suggests that their website has been compromised by hackers. If the loan website URL was sent to you via a spam email, it is either a scam or a lender that charges an unacceptably high interest rate.
Most people know about the need to shop for the lowest interest rate when looking for an unsecured personal loan online. Be sure to compare apples to apples, or in this case, APR to APR. APR stands for annual percentage rate. This is the interest rate that you’re paying per year on the loan. The annual percentage rate may be called the nominal or effective interest rate. This is in contrast to the monthly rate. Always look for the loan with the lowest annual interest rate because it has such an impact on the total borrowing costs. For example, a 5 percent monthly interest rate translates to a 79 percent annual rate. A 20 percent APR is equivalent to a 1.5 percent monthly interest rate. Note that the APR is only one borrowing cost. Late fees, loan origination fees and other costs may be spelled out in the loan’s terms and conditions.
Loan terms are often overlooked, but they can have a major impact on your finances and your experience as a consumer. For example, a company that aggressively pursues people the day they’re late on their first payment can make your life miserable. A company that requires you to pay a prepayment penalty will simply keep you in debt longer. Hefty fees if you’re late making a payment can cost you, especially if they charge interest on it. If they add loan administration fees to the balance or have other hidden fees in the fine print, you may end up paying more than you expected. In a worst-case scenario, they pursue you for a past due amount plus interest when you thought you made the last payment. Being told you need to roll over the loan into another loan term because you haven’t really paid it off will keep you in debt longer.
If you have a history of not paying the loans off in time or in full, you may need to roll over the loan. This generally comes at a price. What is it? Some lenders charge a modest fee to extend the loan term and lower your monthly payment. Others charge you so much that you will never stop being in debt to them. That’s a common problem with payday loans. Other lenders just charge you a fee when you try to pay off the loan early.
Take the time to understand when the payments are due. Do you have to make the installment payments at the first of the money, the first Monday or at some other date? If you’re wrong, you could be hit with late fees. You could even run into problems because they hit your bank account first thing in the morning, whereas your paycheck is deposited at the end of the day. You can learn about this sort of thing when you read reviews about the lender before you sign up with them.