About Unsecured Personal Loans

Unsecured personal loans, commonly offered by banks and credit unions, do not require collateral. However, getting approved for an unsecured personal loan requires a high credit score, and only a small percentage of people qualify for such loans. The funds acquired from an unsecured personal loan can be used for multiple purposes. Some borrowers use the money to pay off debts, whereas others use the money to start a new business or pay for home improvements.

Features

Unsecured personal loans feature a fixed rate. With a fixed rate, minimum monthly payments remain the same for the life of the loan--unlike an adjustable rate personal loan, in which payments can increase or decrease with each rate adjustment. Unsecured personal loans do not typically feature a prepayment penalty. Therefore, borrowers can submit additional payments toward the principle at any time, and reduce their loan balance before the end of the term.

Types

Although unsecured personal loans are commonly offered by banks and credit unions, cash advance loans are also considered unsecured personal loans. Both types of loans can provide borrowers with money to solve their cash flow problems. However, getting approved for an unsecured cash advance is less difficult. These loans do not require good credit or a credit history. In addition, borrowers do not need a co-signer. Unfortunately, unsecured cash loans feature high finance fees and short terms.

Benefits

Unsecured personal bank loans are beneficial because they typically feature lower rates than credit cards. In fact, some borrowers apply for an unsecured personal loan and use the money to consolidate or pay off high interest debts. Because credit cards are revolving lines of credit, it can take several years to pay off the balance. On the other hand, a fixed rate unsecured personal loan offers fixed terms, in which a borrower can anticipate a pay off date.

Misconceptions

Banks, credit unions and other financial institutions do not approve everyone for an unsecured personal loan. In fact, some people with a high credit score are denied for such loans. Although an excellent credit history can persuade a lender to approve a loan, they take other factors into account. For example, applicants with a high debt-to-income ratio may not qualify for an unsecured loan. Because collateral is not involved, lenders have to be careful and consider the potential risk with each applicant.

Warning

Although unsecured personal loans carry lower interest rates than most credit cards, the rate on the loan is typically higher than a secured personal loan. Interest rates affect monthly payments. Unfortunately, lenders have to charge additional interest because the loan is not backed by collateral or security. Risky loans commonly feature higher rates. In the case of an unsecured personal loan, if a borrower defaults on payments, the lender cannot claim their personal property.