How to Acquire an Unsecured Personal Loan without Collateral
August 29, 2018 (Investorideas.com Newswire) Americans borrowed an estimated $117 billion in personal loans in 2017, 40% more than they did in 2014. With serious payment default rate expected to go below 3% by end of 2018, financial institutions are increasingly willing to offer small loans without collateral.
Unsecured loans come in handy during medical emergencies or when you need to visit a sick loved one or clear exam fees. The loans sometimes attract high-interest rates, sometimes as high as 30% per month but not always.
The opposite of unsecured loans is secured loans for which you offer collaterals such as your car or house. If you are unable to pay the money, your car is auctioned off to recover the principal amount you borrowed.
If you're looking for a small loan which you're certain you can pay back within one to three years, an unsecured loan is the better option. But how do you acquire one?
Evaluate your Credit Score
Some financial providers base the amount of loan you qualify for on your credit score. They determine the interest rate to charge you based on the same metric. That means if your credit score is excellent; you can qualify for a higher amount and with a lower interest rate.
Your credit score doesn't have to be good though. Some banks may be willing to lend you money with a poor credit score albeit at the cost of high-interest rates. To avoid such a situation, it's best to work on your creditworthiness before looking for an unsecured loan.
Before they check your credit score, some providers take you through a prequalification stage. You will be asked to provide personal information like name and contact details. Some may ask details about your parents, debt obligations, and your social security number.
Most people fail the prequalification stag if:
- They don't have a stable means of income
- A high debt to income ratio
- Their credit card applications are excessive
- No work history
If you pre-qualify, you're only a few steps to getting your first loan without collateral. But before then,
Compare Loan Offers
Apply for personal loans to different banks, credit unions, and online money providers. You will get all sorts of offers. The interest rates will be different and some will offer exceptionally flexible repayment methods.
The average APR is 15%. Some providers offer an interest rate of just 10% while others offer up to 36% annual rate. Comparing loan offers may also help you know whether they're better options than an unsecured loan. Some credit cards, for example, will offer 0% APR under certain conditions.
Major banks have the best offers if you have a good or excellent credit score. If you have an ongoing bank with the particular bank you want a loan from, the better the terms. Online providers are the best alternatives if you have a poor credit score.
Payday kind of loans tends to have high interest rates and terms meant to tie you to never-ending loans. Avoid providers with poor reputation online and instead, stick to licensed companies.
Read and Confirm the Fine Print
Don't get distracted by low-interest rates. Conditions like automatic withdrawals may take a hit on your monthly balances and overdraft fees. The APR fees advertised may not reveal hidden charges until you read the fine print.
Reading the terms of the loans can reveal a lot of details banks omit when issuing loan offers. Read every fine print you can access before confirming a loan application. Some creditors send your payment to credit bureaus, which may help improve your credit score.
Borrow only what you need
One of the biggest mistakes you can make when borrowing an unsecured loan is to borrow excessively. It's a common mistake people make especially where your income is low. But once you start paying the loan, you realize it was not worth taking more than you need.
Borrowing a bigger amount can hurt you more than you may initially think. In addition to paying more money every month, it could force you to borrow more money to sustain your life. In the long run, more debts could hurt your credit scores and your lifestyle.
Personal loans are best taken to cover emergencies or to add to your investment. Taking the loans for holidays or to cover expenses is best done with your personal income.
Make Plans to Repay your Loan
Most loans are paid in installments that include the interest rates. You can pay weekly or monthly depending on the terms specified by your provider. Monthly payments are the standard repayment method.
If you have a stable job, repaying the loan might not be a big issue. However, if you got your loan while holding temporary jobs, you will need to plan how to clear the loan. Failure to clear an installment may attract additional interest rates and put a dent on your credit score.
Look for a stable job or increase your income streams. Invest more and reduce other debts. Make it your goal to have fewer loans. Once you clear one loan, you can borrow more if the need arises. Before then, come up with a plan to pay your small loan until the balance is zero.
Consider Alternative Payment Methods
Ask your provider for different loan repayment methods. Some companies accept an interest only kind of deal. You pay the interest rates first and later pay back the principal amount. It's a good deal if you have an unstable job and low income.
Another repayment option is to ask for a balloon payment. With the method, you pay the loan and interest rate at one ago after a specified period of time. It's a good option if you're expecting a lump sum payment sometimes later. But if you're not, it can be a nightmare.
Most people think they will have the money in the expected repayment period. Some people ask for this option with the hope they can always take a different loan to refinance the first loans. The best option, however, is to get a stable income source and pay your loan through monthly installments.
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