Unsecured loans: Everything to know
Learn all about what makes unsecured loans different. (iStock)
Sometimes you need a little extra cash to help make that big purchase, supplement your income for daily needs, consolidate your debt or help pay for your education. If you are thinking about getting a loan that does not require any collateral, then now is good to familiarize yourself with the primary characteristics of unsecured loans.
What is an unsecured loan?
An unsecured loan is a type of personal loan that lets you borrow a specific amount of money without requiring you to have collateral. In other words, unsecured loans are appealing because they are not backed by assets.
If there is no collateral the loan is considered unsecure because the lender cannot take any of your personal property if you fail to repay the loan for some reason. This means the financial institution is taking on more risk. The Consumer Financial Protection Bureau noted that you obtain this loan primarily based on your income and credit record.
These loans can be used for everything from consolidating debt to planning a wedding or even an exotic vacation. If you're looking to take out this type of personal loan or you want to research other personal loan options, head to multi-lender marketplace Credible.
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Types of unsecured loans
There are three primary types of unsecured loans that most borrowers look to.
- Personal loan
- Credit card
- Student loans
1. Personal loan
A personal loan is a pre-determined set amount of money that you can borrow and use for anything your heart desires. The funds can come from a physical bank, online lender or credit union. Personal loans have fixed interest rates and fixed terms and are repaid in monthly installments over a set time frame.
Using Credible, you can see what every personal loan lender has to offer. Just enter your desired loan amount and estimated credit score to see what rates are available.
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2. Credit card
Another type of unsecured loan is a credit card. You can obtain a credit card from any financial institution and once the card is in your hands the funds are immediately available. With a credit card, you usually do not have a chunk of cash available at once.
Instead, you use the card to pay for purchases and a set amount is available to take out and use as cash for a higher interest rate. But it’s also fairly easy to have multiple cards to spread out your balances.
With Credible, you can browse credit cards by card type and find out fees and offers in one window.
3. Student loans
Borrowers looking to finance their education turn to student loans. This is like a personal loan, but with restrictions. Student loans are given to people to help pay for their college tuition and other school-related needs such as books and housing.
You can visit Credible to explore private student loan options to see what rates and terms you might qualify for. You can also use Credible's student loan calculator to crunch the numbers and determine how much your monthly payments will be.
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How are unsecured loans different from secured loans?
There is one major difference that separates a secured loan from an unsecured loan: collateral.
When you get an unsecured loan there is no need to put up personal property as collateral. That is a huge plus for borrowers hoping to get a quick loan without having any assets that need to be evaluated.
On the other hand, secured loans are backed by something valuable such as a home, automobile or even a fancy instrument. The lender keeps the deed or ownership title until you make the last payment on the loan. If you do not pay as agreed, the lender has the right to take your collateral — aka personal property — and pay off the debt.
Because of the use of collateral, secured loans may have higher borrowing limits and lower interest rates. The bank takes on less of a risk on a secured loan such as with a mortgage or automobile where your home or car is on the line and put up as collateral in the event you don’t pay. Additionally, the CFPB noted that borrowers just starting to build their credit history or who have lower credit scores, may find it easier to get a secured loan.
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How to get approved for an unsecured loan
Getting approved for an unsecured loan just takes filling out an application online for an easier experience. The application will ask for personal information such as your social security number, salary, employer and monthly debt.
If you have a credit score above 700 then you will likely get the best rates for an unsecured loan. The lower your score the higher your interest rate will be. Since unsecured loans are not backed by assets, the lender will decide whether to approve your loan based on your financial history, including your debt-to-income ratio.
One of the best ways to research a number of lenders at once is to visit Credible. With this method, you can communicate with experienced loan officers and get your questions about unsecured loans answered. This is especially great because it allows you to compare lenders and pick the one that is best suited for your financial situation and needs.