Have you wondered what’s the difference between secured to unsecured loans?
Personal loans are loans underwritten based on creditworthiness. They can be repaid through fixed installments.
By contrast – Auto or mortgage loans are standard secured loans; if you fall behind on payments, the lender can reclaim the items that are at risk.
What Are Unsecured Loans?
Unsecured loans, also known as personal loans, work in a different way.
So let’s take a closer look:
These are loans that you can take out for general use such as going on a field trip, taking a mini cruise, or using for emergencies. Furthermore, these loans would have a higher interest rate due to the fact that the lender can’t reclaim the items. The lender may require additional expenses as well (Read how to find the best lender).
It sounds simple. But it isn’t.
It requires research when choosing a personal loan that fully meets your criteria. Due to the fact that interest rates and lender fees can differentiate, be sure to know the terms for each loan. Also, see what additional options are available for you. Only use the original amount you intend to spend. This reasoning is because lenders often give you credit that’s over the original amount stated.
you will have to pay interest based on the amount you spend from what you borrow or credited to you.
Moreover, be sure to consider the reason for taking out a personal loan. Funding for a cruise or a mini vacation both hold a lesser weight than trying to pay off old debts or other legal fees that pose a risk to your financial stability.
Here is a list of names to identify this category of loans:
- Signature Loans
- Personal Loans
- Debt-Consolidation Loans
- Unsecured Personal Loans
- Installment Loans
The loans mentioned above are very similar to one another. If you aren’t familiar with the different types – you should start here.
Main Features Of Unsecured Loans
The interest rates you receive are evaluated by your credit score and history
The lenders determine your eligibility by your credit history. They check your debt ratio and your income to determine whether or not you are qualified. People with low credit scores have lower interest rates with a maximum annual percentage rate of 36% (See how to repair bad credit). This rate is considered cost-effective according to those in legislation and other experts.
No need for collateral
This is why the loan is referred to as an “unsecured” loan. Lenders can report you to the credit bureaus if you don’t make payments on time. They can also send your payments to collections and sue you for not paying off the debt. Lenders do not have the legal access to take your property. On the other hand, lenders can use secured loans to confiscate things such as vehicles.
You have complete control over how you spend your money. The rate that is offered is typically the same regardless of the amount of money you decide to use (See how to get your credit score ). In rare cases, there are exceptions: lenders charge higher interest rates on a loan that is used for debt consolidation, versus loans being used for vacations, such as a beach cruise.
Loans for personal use are recorded on your credit report
As you’re making payments on your loan, expect that the lender will send monthly reports to either of the 3 credit bureaus. They will also report late payments. When you pay your installment loans on time, doing so will reflect a positive change on your credit score. The credit score algorithms will review both installment debts, such as personal loans, and revolving debts, such as credit cards and personal lines of credit.
Other Types Of Unsecured Loans
There are other ways to lend that are considered “personal loans”, but they really aren’t.
Payday and Cash Advance Loans
They are repaid with large sums of money upfront when the borrower gets paid rather than having a monthly payment plan. The amount usually granted can range from a few hundred or less depending upon the borrower’s request.
If you fail to repay the loan, it will be reported to the collections agency and damage your credit report. These types of loans are considered short-term. If most borrowers cannot afford to pay off a payday or cash advance, they will take out additional loans. As a result, interest charges grow higher and faster. Having an APR of 200% or more is not out of the norm.
Line Of Credit
A line of credit is a specific amount that has been granted to you on a need basis.
This requested amount is withdrawn from that line of credit. This method of credit is similar to how credit cards are used in regards to revolving credit. For the most part, banks and credit unions offer personal lines of credit to those who have excellent credit histories. Also, having a secured line of credit is similar to using collateral for various assets.
You can expect a lower interest as well. Cash advances from a credit card are cash amounts withdrawn from your card’s credit limit. These payments vary and they are not fixed. These rates are typically higher than rates of a general credit card purchase. For example, a Capital One cash advance fee is either $10 or 3% depending on what’s higher on the amount borrowed.
Interest Rates of Personal Loans
When it comes to paying interest on a personal loan, there are only two options, and there’s no way to maneuver around it. Choosing between a fixed or variable rate all comes down to your personal desire.
Listed below are the pros and cons of both types:
Fixed Personal Loans
Having a fixed rate means that the rate doesn’t change over the span of the personal loan; it’s locked and a done deal.
- Don’t have to worry about a rate increase.
- The amount to be paid per month doesn’t change making it easier to plan financially.
- Fees and rates are higher than variable personal loan rates.
- If there are lower interest rates, you can’t change it.
- You can start paying ahead, but there could be some additional charges.
Variable Rate Loans
With this type of loan, rates can change at any given time. Your minimum payment may be different per month depending on how the interest increases or decreases.
- You’ll get lower rates and fees in comparison to having a fixed interest rate.
- When interest in the market goes down, that means your payments will go down as well.
- Due to fluctuations in interest rates, it’s hard to budget and plan accordingly.
- If interest rates increase, so will your minimum monthly payment (read how changes in interest rate impact on your investments).
Matters To Consider When Choosing A Personal Loan
Choosing a loan that fits your personal financial needs can feel overwhelming at first. I’ve written below some key points to consider that will make the decision process more of a breeze.
Low fees: If at all possible, make sure this is as low as it can be.
Borrowing: The minimum for borrowing is around $2000, but it can be more depending on the amount you’re qualified to receive.
Flexible repayments: Be sure to look for loans that offer you the options to make additional payments. You never know. You may find yourself with more cash than expected.
Redraw facility: If you have a bank loan that you have been making payments on, you can redraw it again if need be. This is good just in case of emergencies or pertinent matters.
Above all, it would be great if money would poof out of thin air! In reality, though, it’s not. On the other hand, there are good options to receiving money, such as getting a personal loan. Even though you have to pay it back, it’s still a good way to have some extra cash.
There are many options to choose from:
You have to make the best decision possible based on the reason for applying for the loan. Whatever the type of personal loan you choose, interest will be accrued over time. As a result, make sure to read the fine print so that you know the best option for you. In this guide, you’ll find all of the information you will need about personal loans to make the best decision possible for your situation.
Choosing the best loan for the task at hand is important. In addition, choosing the wrong loan could pose a financial risk with hidden fees to address. Consider going to a finance expert to make sure that you are making the best decision possible when applying for a personal loan, if you are hesitant. If you decide to apply for our unsecured personal loan, you don’t need any valuable resources to do so.
Moreover, terms and condition do apply; they are available upon request. New terms and conditions can be presented in the future as well. Credit or loan applications will be subject to the decision of the bank.