Most Americans carry some debt, whether it is mortgage loans, student loans or credit card balances. By generation, 81 percent of Baby Boomers, 80 percent of GenXers and 82 percent of Millennials owe money. Even among the older crowd, there is an ignorance of the different types of debt, especially regarding secured and unsecured loans for bad credit. The following discusses unsecured loans and the benefits and drawbacks of using them.
What is an Unsecured Loan?
An unsecured loan allows a person to borrow money without putting up collateral, such as a home, vehicle or other high-value asset. In order to be approved for this type of loan, the borrower should have a good to excellent credit score. The following are examples of unsecured loans:
• Credit cards
• Student loans
• Signature loans
• Personal credit line
Each of these can be revolving or term loans. A revolving loan allows credit to be used, paid off and then used again. A term loan requires repayment in equal installments over a set time period.
Unsecured Loan Types
There are two types of unsecured loans:
• Personal loan. This is a loan of $5,000 to $50,000 that is repaid through installments at a fixed rate of interest. The interest rate is determined by the credit score of the borrower. Higher scores mean lower rates. Typically, a lender will require a score of 640 for a personal loan, but there are options available for those with a score between 580 and 640.
• Payday loans. For those who really need cash and have no other options, alternative lenders can be considered. This can be in the form of a payday loan. This loan type is risky and comes with a high rate of interest. Alternative lenders may also require borrowers to allow withdrawals from a bank account or produce postdated checks to recoup their funds. A payday loan should always be the last resort to obtain money. Personal loans are a safer way to go.
Benefits and Drawbacks of Unsecured Loans
Unsecured loans have benefits and drawbacks. These are explained below.
• Pros. Whether the borrower needs money for overdue bills, a medical emergency, a home remodel or to finance a wedding, they can rest assured that they are in no danger of losing their house or other valuable asset. The loan completion process moves faster and approval often occurs on the same day. This is a large benefit for those who need money immediately.
• Cons. The downsides to obtaining an unsecured loan are higher interest rates for poor credit scores, and the loan amounts are often limited to $25,000 or less. Student loans and personal loans also have less flexibility because they must be repaid by a certain date, and the borrower can be penalized for paying a balance off too soon. Personal credit lines and credit cards are more flexible on repayment terms.
Approval Tips for Unsecured Loans
The following tips are helpful for unsecured loan approval:
• Get a cosigner. Some borrowers may not be able to obtain a loan if their score is too low. A cosigner is someone with a high credit score who will take over loan payments if the borrower defaults. In most cases, using a cosigner will help the borrower get better loan terms.
• Provide proof of income. In cases where the borrower does not have much credit history, they can still be approved for a loan if there is proof of regular income. The borrower should provide a copy of their employment history along with recent pay stubs. This will help the lender assess risk and set the loan terms.
• Build a credit score. This is done by making on-time payments each month, avoiding balances on credit cards and not using more than 30 percent of income for credit utilization.
Best practice for getting an unsecured loan is doing research and shopping around for the best terms and interest rates.
The staff at DR Credit is always available to match people to the best loan for their needs. Those who need to borrow money can visit the website and send a message for more information.
