Life can throw major expenses at us and we’re not always in a position to pay for it with savings. When this happens, many consumers turn to an unsecured loan. An unsecured loan simply means you don’t have to provide any type of collateral for securing the loan, such as a home or vehicle. You’ll find many examples of these types of loans, such as when we use credit cards, take out student loans, or apply for a personal loan.
How Does an Unsecured Loan Work?
You may hear unsecured loans referred to as signature loans because you guarantee the loan with your signature versus offering collateral. Many financial institutions, including Peoples National Bank of Kewanee, offer unsecured loans. The amount usually ranges from a few hundred to a few thousand dollars.
Before you can get approved for the loan, a lender will most likely check your credit report and credit score, verify your income, and possibly request other documentation so the lender can establish whether or not you can pay the loan back. Once approved, you can generally use an unsecured loan for a variety of reasons. You’ll make monthly payments until the end of the loan term, and each payment consists of both principal (the original amount you borrowed) and interest (the cost of borrowing the loan).
What Makes an Unsecured Loan Different from a Secured Loan?
The difference between an unsecured loan and a secured loan is that an unsecured loan doesn’t require collateral. Common examples of unsecured loans include credit cards, student loans, and personal loans.
The most common examples of a secured loan include a mortgage or auto loan. If you end up not making payments and defaulting on a secured loan, the lender can take back whatever it is you used for guaranteeing the loan. Keep in mind, while you may not want to offer collateral for a loan, secured loans typically have lower interest rates since there’s less risk involved for the lender.
Pros and Cons of Unsecured Loans
Before you go down the path of borrowing an unsecured loan, it’s important you weigh the pros and cons of this type of loan.
Pros
- You don’t have to pledge any assets for collateral
- Unsecured loans can be used for a variety of purposes
- You can close on the loan in a shorter amount of time
Cons
- More strict eligibility requirements for approval
- Higher interest rates, particularly for buyers with derogatory credit
- Subject to debt collection or lawsuit if you fail to make payments
Unsecured loans can offer greater convenience and quicker access for funding. However, this more convenient option can also have higher interest rates and stricter approval requirements.
How to Apply for an Unsecured Loan
If you’d like to take on an unsecured loan, then follow these simple steps for the application process:
- Determine the amount you need: Borrow only what you need, even if the lender approves more for you.
- Compare lenders: You can compare interest rates, loan terms, digital assets, and other factors from one lender to another, so you can pick the right one for your loan.
- Submit the application: Most lenders offer an online application or you can submit it in-person.
- Provide the necessary documentation: Each lender has its own requirements for loan approvals. Providing the requested documents quickly can make the approval process faster.
- Receive your loan funds: Once approved, the lender will let you know your funding options and you will likely receive a lump sum payment. However, if it’s a revolving loan, such as a credit card or line of credit, then you’ll draw from it as needed.
Unsecured Loans FAQs
Can I get an unsecured loan for any purpose?
You can use an unsecured loan for almost any purpose, such as home improvement projects, debt consolidation, or a wedding. However, lenders may have restrictions regarding the use of funds for certain activities, such as student loans or starting a business. Most of the time a lender asks for the purpose of the funding.
What happens if I can’t make payments on my unsecured loan?
While some lenders have a grace period, you will most likely have to pay late fees. Payments more than 30 days late can have a negative impact on your credit score and the debt collection process can start once you miss more than two payments. Finally, a lender can pursue legal action against you if there’s a default on the loan.
Do you have more questions about unsecured loans? Contact our lending team for assistance!
