A personal loan is a loan given by a creditor to a borrower where the creditor does not receive any collateral as guarantee of loan repayment. Personal loans are also frequently called unsecured loans or unsecured debt; due to the fact that there is no physical security offered by the borrower that repayment will be made. The creditor is relying on the borrower's credit history and personal promise that the loan will be repaid. Due to the riskier nature of unsecured debt, these types of loans typically command a higher interest rate than less risky, secured loans.
Types of unsecured debt
Credit Cards - Credit cards are the most common form of unsecured consumer debt. Generally, the only requirement to qualify for a credit card is a decent credit score and a source of income. Furthermore, special student credit cards are often issued to college students without full time employment. Credit cards command high interest rates, usually from 12% to 22%. However, consumers can avoid interest charges by paying off their balance monthly.
Bank Loans - Unsecured bank loans are available for people for a variety of reasons; from sudden, unexpected bills, to home improvement projects or one-time purchases like vacations. These loans can be more difficult to get, as banks will want collateral whenever possible before lending money. Most unsecured bank loans are short term with high interest.
Payday Loans - Payday loans are available from a wide variety of specialty lenders, both online and at their brick and mortar locations. These personal loans are relatively easy to get as long as you can provide a proof of income. Most payday loan vendors advertise money in minutes, appealing to people looking for a simple and quick cash infusion. Typically, no credit check is conducted.
In order to offset the high risk of these unsecured loans, very high interest rates are charged. A typical loan of $500 can cost $100 and be due in one or two weeks.
Get the best deal - three considerations lenders will make
- Credit Score - Credit score is the most important factor examined when applying for a personal loan. A good credit score lets lenders know that, based on your past behavior, you are a good bet to repay the loan. If you don't want your credit checked, be prepared to pay the highest interest rates.
- Your Cash Flow - Don't expect to receive any type of loan without a full time job, or other regular source of income.
- Current Debt - This factor is important in letting the lender know whether repayment of their loan will be a priority. If you already have high monthly debt commitments, you can expect your application to be declined or approved with high interest.
Begin Your Personal Loan Application Now
Unsecured personal loans can be a life saver given the appropriate circumstances.
Remember, the best way to ensure that these types of loans will be available to you is to maintain a good credit score.
It is recommended that you check with credit bureaus annually to ensure their information is current and accurate.