The Average Interest Rates for an Unsecured Loan
An unsecured loan is a loan that is not secured by any collateral. A common example of an unsecured loan is a personal loan. While the interest rates for unsecured loans can vary wildly from one lender to the next and from one year to another, understanding the industry averages can ensure you get a fair rate when applying for an unsecured loan.
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By the Numbers
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The average rate on unsecured loans is typically a couple of percentage points higher than secured loans with similar repayment periods. Thus, when interest rates go up or down on secured loans as the result of national economic factors, the interest rates on unsecured loans tend to adjust accordingly.
Significance
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Unsecured loans present a bigger risk to lenders than secured loans. That's because once lenders disburse money from a loan to consumers, those consumers can quickly spend the money, then default on the loan, leaving the lenders to absorb the loss. Lenders have no collateral to seize and sell off to recoup their money, as is the case with a car or home loan.
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Influencing Factors
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Unsecured loans, for the most part, are given out based on consumers' creditworthiness. Thus, an individual with a very high credit score is likely to get a much better interest rate than someone with very poor credit. The exception to this is some student loans, which are unsecured. However, they're different than other types of secured loans because they're often backed by Uncle Sam and can't be discharged in bankruptcy.
Things to Consider
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When seeking an unsecured loan, know your credit score so that you know up front what kind of interest rate you can expect to be offered. Also, be aware that unsecured loans often come with repayment periods of just a few short years, so even if you're only borrowing a small amount of money, if you get a high interest rate as the result of poor credit, your monthly payments could be quite high. Do your math to ensure you will be able to afford your payments.
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References
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