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Updated on Tuesday, December 4, 2018
Life always has a way of coming up with new ways to surprise us. When those surprises call for quick cash, an unsecured personal loan might be what’s needed to fill in the gap between the funds you have and the debts you owe.
Taking out a personal loan to consolidate your existing debts might be wise if you’re facing high interest rates. Also, rolling all your debts into a single payment and interest rate can make it easier to manage and track how much you owe and how long it’ll take for you to pay off the loans.
An unsecured personal loan may also be preferable to selling your assets to get the money you need to pay for large purchases or unexpected emergencies.
What is an unsecured personal loan?
A personal loan is considered unsecured when it’s not backed by collateral, such as your car, which could be repossessed by the lender if you default on your loan agreement. Instead, unsecured loans are backed only by your promise to repay the lender, which is why they are called unsecured, or sometimes signature, loans.
Because an unsecured loan doesn’t require you to put down any collateral, lenders rely heavily on various factors to determine whether you’ll pay back your loan in full. Such factors include:
What can an unsecured personal loan be used for?
An unsecured loan is provided to the borrower in a lump sum and can be used for virtually anything, including:
- Debt consolidation, which is where you use the personal loan to pay off high-interest debts, leaving you with an easier-to-manage single interest rate and monthly payment.
- Special experiences such as a wedding or honeymoon so that you can enjoy the experience without worrying about the money.
- Home improvements or other large appliance purchase, but borrowers should also consider alternatives such as a home equity loan or a home equity line of credit.
- Medical bills for an unexpected treatment that isn’t covered by your health insurance.
- College tuition to invest in your and your child’s future.
- Business expenses to scale and set up your organization for success.
- Unexpected expenses for those emergencies that often come up in life.
Still, borrowers should make it a point to check with their lender for any guidelines on ways in which the funds can be used.
Personal unsecured loans generally have term ranges between two and five years and rates that are usually fixed. The monthly payment is based on how much money you owe and the interest rate, which is determined by your credit rating and financial history. Some lenders offer revolving lines of credit that allow borrowers to withdraw as needed and only pay interest on the amounts withdrawn.
Where to find unsecured personal loans
If you’ve decided that a personal loan is right for you, you’ll need to begin researching lenders and the terms they offer.
MagnifyMoney offers a personal loan marketplace where you can discover lenders and review the loan terms they offer. But you may also consider these lenders and online lending platforms:
You’ll find that personal loan lenders take different forms: traditional banks, credit unions, online lenders and peer-to-peer (P2P) lenders. If you’re not sure which lender is right for you, consider these pros and cons for each.
At one time, brick-and-mortar banks might have been your best option for a personal loan. But nowadays, you may find that your local bank isn’t a competitive option. Why? Because banks with physical branches have higher overhead costs than online lenders — and they’re still trying to make a profit off your loan. Still, they can be a convenient option.
- Can visit your local branch to learn more and apply
- Likely a trusted and known brand
- Higher fees
- May have stricter loan requirements
Because credit unions aren’t trying to profit off your loan, they can generally offer lower interest rates on their personal loans. But to get a personal loan through a credit union, you have to become a member first — and you won’t qualify for membership at every credit union.
- Lower fees
- May have lower loan requirements
- Have to become a member before applying
- Fewer locations compared to a big bank
Online lenders don’t have brick-and-mortar locations. That could be a good thing or a bad thing depending on your needs. But with fewer overhead costs, online lenders are competitive options for personal loans.
- Competitive rates and terms
- Easier to research, plus streamlined application processes
- Little name recognition can make them hard to find
- No physical locations for in-person aid
P2P lending is what it sounds like: Instead of going to a bank, borrowers receive their loans from their peers who they are connected to through a platform. Since P2P lending is only online, overhead costs are low and customers get lower interest rates. A personal loan through P2P lending comes with some cons, such as an origination fee, which is deducted from the total loan amount before the borrower gets their lump sum. Also, loans are not available in all states, and they can depend on debt-to-income ratio, financial history and career experience. They are generally limited to borrowers with above-average credit and income levels.
- Can share your story if you’re struggling to qualify
- Work with people rather than companies
- Likely to receive high rates
- Harder to qualify for a loan
How to compare personal loans: 3 factors to consider
With so many options, it’s beneficial for borrowers to consider several lenders for a comparison. Below are some considerations to take into account when shopping for a personal loan:
Take a look at MagnifyMoney’s personal loan marketplace and you’ll see that rates are as low as 3.49%. Your loan’s interest rate will impact how much you pay throughout the life of the loan, so it’s important to shop around for your best rate.
Interest rates are determined through various factors, depending on the lender, but they are generally decided based on the borrower’s credit, income and whether there’s a cosigner.
Fees are serious factors to take into account when choosing a lender as they will greatly impact your total loan amount. Here are two common fees:
- Origination fees are charged by the lender for processing a personal loan application. The origination fee is either presented as a flat rate or a percentage of the loan, which is typically withdrawn from the full amount of the loan and incorporated in the APR. This fee is negotiable.
- Prepayment penalties are charged when a borrower pays off their loan ahead of the term schedule.
If you have a strong credit history and are a good candidate for a personal loan, lenders will usually work with you on a repayment schedule that doesn’t overwhelm you each month. For instance, some lenders will allow you to use a cosigner who has good credit for a lower interest rate and term on your loan.
Some lenders take a nontraditional approach to the merit-based system utilized in personal loans. For instance, Earnest offers flexible terms along with customized loan and repayment plans, which work well for recent graduates who haven’t yet had the opportunity to establish a strong credit history. Upstart, founded by “ex-Googlers,” uses artificial intelligence and machine learning to determine whether someone would be a good borrower based on their education, career, job history and standardized test scores.
Some lenders are forgiving during challenging times. SoFi offers loan forbearance during a job loss. During this time, the interest will continue to accrue, but SoFi will not consider your payments overdue. LendingClub leaves its borrowers alone for at least 30 days if they’ve been affected by a natural disaster.
Applying for an unsecured personal loan
Most online lending platforms use a soft pull during the application process so that you will be able to shop around for your best interest rate and loan term without hurting your credit. These are called preapprovals or pre-qualification checks, but they are usually contingent on you passing a hard credit inquiry after you’ve accepted the loan offer.
While shopping around for the lender that works best for you, consider using MagnifyMoney’s loan payment calculator to get an idea of possible monthly payments. Put in the amount you need, the period you’ll need it for and the interest rate to get the estimated amount you’ll pay each month.
Submitting your application
Since an unsecured loan is not backed by anything other than a borrower’s creditworthiness, you’ll need a good credit score and documentation — recent pay stubs, tax returns and an offer letter to prove employment status – proving you have enough income to repay the new loan.
If you have this kind of information handy, the application process can be quick and simple.
Receiving loan funds
This varies by lender, but decisions are usually made quickly. Funds can be deposited as early as the same business day. Check with your lender on wait times.
Once you have your funds, make sure you are responsible with them. Taking on new debt can be scary if you don’t have a plan for repayment, so make sure you understand how your personal loan fits into your budget.