Due to the simplicity of the application process, and also the broad range of offers, many individuals lean every day towards an unsecured loan over any other type of product. It is important for you to understand that the term unsecured refers to the fact that there is no collateral covering the default of the loan. This means that in case of a default, the institution would have to go against you in order for them to get their money back in full. This creates a scenario where the risk is fully taken by the financial institution.
Since there is nothing to take the fall, financial institutions take extra steps and deep dive further into analyzing the credit score of the borrower in order to determine their creditworthiness and their past actions.
A credit score is an open diary that gets modified every day, and just like information might flow out of it, new information is also coming in. This offers a window to the soul of an individual in some ways, allowing the institutions to make the decision of lending or rejecting the request based on the possibilities of you defaulting again. At the end of the day, it will all act as a numbers game.
What is an Unsecured Loan?
A common misconception that many individuals have is that they think that an unsecured loan is a specific type of loans like a consolidation loan or a students loan, while in reality, it is just the designation given to any loan that does not have a collateral backing the debt.
Some of the most common types of unsecured loans are personal loans, student loans, and consolidation loans. In todays market it is easier to see a bank or any financial institution offering an unsecured loan than a secured loan, the main reason for this is that as banks are becoming online institutions it becomes harder and more expensive than ever to deal with the process and the management of appraisals needed to lend over an X asset. In most cases where the secured loan is given nowadays, the asset used as collateral is cash or securities that can have the custody directly by the institution without much hassle.
Since there is not an asset that will cover for the owed amount in case of a default, the responsibility, and liability for the money falls directly in the hands of the borrower. In case of any criminality of wrongdoing, the response against the law and also against a civil case will be directly the borrower. As credit scores become the base for more and more aspects of our daily life, it is key for individuals to understand the responsibility that any type of debt and especially unsecured debt requires. It is incredibly easy to put yourself in a bad position if not managed accordingly.
What are the Pros and Cons of Getting an Unsecured Loan?
Unsecured Loans are probably one of the oldest and also most common borrowing vehicles currently available in the market. While not everyone will offer you a secured loan, it is very likely that the financial institution of your preference will lend you through an unsecured loan as long as your credit score is relatively “Ok“. Just like with any decision that will impact your personal or business finances, it is important for you to take your time in order to analyze all the available options and to manage the different benefits and negatives from such.
Before committing to one type of loan over the other, I actively advise you to take a quick look at the pros and cons of borrowing money with an Unsecured Loan. This will help you make a better decision and will also help you understand the different aspects of making such a commitment. Even if you are only planning on taking a loan for six months, you should consider all the impacts it can have in your life if things go south.
- No Risk to Personal Assets and Property: The major differentiator between secured and unsecured loans is the fact that they won’t require any sort of collateral, leaving the entire responsibility to the Borrower. While this might benefit lenders, it also raises the level of risk that lenders and actually taken. Without any asset or security to cover for the loan, the lender is taking a higher beta of risk and in return, it will ask for a higher interest rate. Keep in mind that if you have the opportunity to choose for an unsecured loan, you will be able to sleep at night knowing that in case of any default your roof or even your retirement funds won’t be taken.
- Typically Easier Process: Since the most common drivers utilized in order to determine the eligibility of an individual for an unsecured loan are managed inside the own bank or institution, the overall process is faster and easier. Take into consideration that unless the collateral is cash or any type of security in the custody of the bank, it would require external reviews in order to evaluate the collateral beforehand. This is actually one of the main reason why the process can be faster and more straight forward.
- Wider Range of Products and Providers: Most financial institutions in the market will offer you an unsecured loan, but not many will be willing to deal with all the hassle of starting a process to appropriate from someone’s house or their car in case of a default. As mentioned before, it is simply easier for most institutions to take a higher interest rate and a higher beta of risk than dealing with collateral assets and so. It is important to keep in mind that since many firms offer this type of products the overall market has flourished with all kinds of loans. In the past the most come type of unsecured loan was for Personal borrowing, nowadays almost every type of borrowing can be achieved without collateral.
- Fewer Restrictions: As mentioned before, utilizing collateral implies a lot of different rules that will differ from institution to institution. Valuation of assets won’t be the same, risk exposure will vary as well. Take into consideration that depending on your situation, being able to borrow money without having to risk your heritage or simply any asset can be a no brainer. Since the only real restriction will be the ratio of income to debt and also the credit score, it is easier to approach borrowing through an unsecured loan even if it means a shorter term loan and also a smaller amount.
- Smaller Amounts: Even though in most cases the amount that can be lend will be based on your income and also any existing debt, it is important to keep in mind that most financial institutions will only lend to an X amount. Though this sounds odd to say, it is important to mention that disregarding your income, without a further model of collateral it will be very difficult to aim for a bigger loan. If you were planning on getting a large loan you might want to look into utilizing some collateral to bring down the level of risk taken by the bank, this will help you lower your rates and will make the overall structure more attractive.
- Higher Rates: Since the level of risk taken by the bank is higher, you should expect the same to happen with the interest rates given. Take into consideration that in case of default you will be the only responsible and that the institution will most likely go behind you in a legal process. If you have collateral and you are certain that you won’t default, it might be a good option to think about utilizing it, if it is that you are interested in borrowing at the cheapest interest rate possible.
- Requires a Relatively “Ok” Credit Score: If you have a dented credit score, to say the least, it is very likely that you will be rejected by most financial institutions. Please keep in mind that your credit score speaks for you, it is the only way the bank has to determine your creditworthiness and also how you have behaved in terms of repaying your debt. If you’ve had defaults in the past it will automatically raise most flags. While it is still possible to get an unsecured loan with a relatively average credit score, you should keep in mind that the cost of borrowing will be out of the charts. If your credit score does not point there are many ways and financial vehicles you can get in order to improve your score. Don’t forget that your score can be improved, it is nothing to feel ashamed and in the end, there will always be room for improvement.
Best Unsecured Loans Providers in 2019:
1. Prosper | Best for: Unsecured loans for Debt Consolidation
Prosper is one of the firms that revolutionized the world of peer to peer lending, the firm acts as an intermediary or a marketplace between individuals who need to borrow and those who are looking to lend as an investment. This is not a new type of market, and certainly, prosper is not the first one to offer these products, but the firm has become a powerful force and its own following of individuals.
An important point to mention is the fact that the firm offers loans that can be used for almost every kind of purpose, from consolidating debt, personal spending, home improvements and more. This, in particular, is one of the reasons why the company has become such a known name in the market. Not only it is firm that truly advises and takes care of both lenders and borrowers, but it also offers a wide variety of products to satisfy the demands of most individuals on the two sides of the aisle.
One of the key elements is the fact that all loans offered by prosper are unsecured loans, this also implies that in order to be eligible the individual must have a relatively decent credit score. Take into consideration that at the end of the day it will be an individual filling your request and that the money borrowed will come from someone else and not prosper, this opens the possibility of being able to apply even with a damaged credit score. At the end of the day if you present a solid case you might still have a chance of fighting for the approval and getting the desired loan.
APR: 6.95% to 35.99%
Loan Amount: $2,000 t0 $40,000
Length: 36 to 60 months
Minimum Credit Score: 600 FICO
Minimum Annual Income: None
- Origination Fee: 2.4%-5%
- Late Fees: 5% or $15
2. Avant | Best for Individuals with Bad Credit Scores
Avant Credit is one of the largest and most important online lending companies in the US. The firm targets mainly individuals with low credit score who are interested in consolidating their debt or simply needs money for emergencies and unexpected situations. According to the company directly, the firms says to target the typical middle-class American in an effort to improve living conditions for these individuals.
It is fairly common to see other companies that also target individuals with a bad credit score churning their clients, truly acting as parasites of the society that are simply draining blood for the ones that truly need the most help. It is great from an advisor perspective to see companies like Avant Credit helping the community and the overall society by offering a well-priced product that truly intends to benefit lives.
If you have a dented credit score you might want to take your time and review Avant as one of the very best options currently available in the market.
- 9.95% – 35.99% Variable
Loan Amount: $2,000 to $35,000
Length: 2 – 5 Years
Minimum Credit Score: 580 FICO
Minimum Annual Income: $20,000
- Administrative Fee 4.9%
- Late Fee $25
- Unsuccessful Payment $15
- No Prepayment Fee
3. Upstart | Best for Individuals with Little or No Credit Record
One of the first requirements to be eligible for an unsecured loan or any type of loan for that matter is to have a good credit score and also existing credit history. The whole idea of the credit score is having some track record that proves that this is not only a shiny credit score because it has not been used or because it has never dealt with any type of borrowing. A great example where this usually has an impact for most individuals is whenever someone is going to college and is getting a students loan for the first time, at this stage of their life most individuals have never even had a credit score or any track record at their name.
This is where names like Upstart have become so popular in the market, the firm focuses on offering loans to individuals who simply do not have the track record requirements that traditional institutions would expect. This is a great opportunity for young students and professionals who need to borrow money for their tuition, their medical bills and any other necessity they might have.
Please take into consideration that instead of simply looking at a nonexisting credit score or at the lack of record, the firm utilizes their model in order to assess factors like college degrees areas of study and also their job history in order to determine creditworthiness.
- APR: 7.69% to 36% (This is where your credit score will make the difference)
Loan Amount: $1,000 t0 $50,000
Length: 3 or 5 years
Minimum Credit Score: 620 (The firm does not request credit history)
Minimum Annual Income: None
- No Origination Fee
- No Late Fees
- No Overdraft Fees
4. Sofi | Best for Individuals with a Good Credit Score
Just like there are institutions targeting individuals with a bad credit score and a relatively low income, Sofi, on the other hand, is probably one of the most exclusive online lenders in the US. The reason for this is that the firm targets individuals with a great+ credit score and on average an annual income that is over six figures.
Take into consideration that this is a fully online operation, this allows for applications to be executed in an incredibly fast pace and for support to be available 24 hours.
Sofi began their business by offering student loans to high earning individuals, it only took them a while before venturing in other areas and vehicles like personal loans, and debt consolidation. It is important to keep in mind that all products currently offered to utilize unsecured loans structure and the fact that personal loans can only be utilized for certain types of spending. If you are planning on borrowing money in order to spend on something besides house remodeling, health procedures, and debt consolidation, you might want to look somewhere else since the firm will most likely reject your application
- Fixed: 5.99% – 16.24% (with autopay)
- Variable: 5.74% – 14.70% (with autopay)
Loan Amount: $5,000 to $100,000
Length: 2 – 7 Years
Minimum Credit Score: 680 FICO
Minimum Annual Income: None
- No Origination Fee
- No Late Fees
- No Overdraft Fees
5. Lending Club | Best P2P Alternative
With all the advancement of the internet and the online connectivity becoming so accessible, peer to peer lending has become one of the go-to options for individuals who are trying to make money by investing it in loans. Following a similar approach to what Upstart is offering, the firm is consolidating lenders and borrowers in the same space, allowing for a connection and oversee for a management fee.
This is a business model that even though it includes one extra step and one extra layer in terms of fees and commissions, it is still relatively cheap compared to other market alternatives.
Since the firm only offers synthetic borrowing, they’ve target personal, student, and consolidating loans via unsecured vehicles. Another important aspect to mention is that even though someone else is giving you the money for the loan, and not the firm. In case of any default the firm would cover for the entire value of the loan and will pay the lender, but this also means that it would be Lending Club against you in a civil action.
Peer to peer lending has become one of the most
- 6.95% – 35.89% Fixed Rates Only
Loan Amount: $1,000 to $40,000
Length: 3 – 5 Years
Minimum Credit Score: 600 FICO
Minimum Annual Income: None
- Origination Fee 1% – 6%
- Late Fee $15 or 5% of payment after 15 days grace period
There are hundreds of reasons why so many individuals get in debt with the help of unsecured loans, and I do not say so as a bad thing. Unsecured loans allow individuals to gain a fast, reliable and relatively cheap model of borrowing, that otherwise would be cover by other types of vehicles like payday loans for example. This model allows for many aspects of the American economy to be positively affected but just like it helps individuals, it can easily become their financial doom if they can not manage the responsibility of payments.
It is important to keep in mind that any borrowing vehicle can put an individual in trouble if not managed accordingly, the only difference with unsecured loans is the fact that the only collateral is your credit score and possible your emotional health if you default. There is not going to be anyone but you as responsible for the owed money, to some degree having collateral might help you ease a little bit of pressure but in most cases, it just changes to be worried about losing your assets as a result.
Keep in mind that you will receive an unsecured loan because a financial institution considers your word and because it also sees you as a creditworthy individual. This is probably one of the most expensive things to fix if broken. The best advice I can give you is to properly understand all the aspects of a loan before signing any contract. Knowing exactly what you are up to will allow you to manage and plan accordingly. Besides, you won’t have to deal with any bad surprises down the road!
Take into consideration the fact that there is not a standard for banks and institutions, in reality, if they are willing of taking the high risk of lending someone with a completely destroyed credit score they could do so. The market is very broad and if you take your time to investigate and review deeply, chances are you will even be able to find institutions marking high-risk unsecured loans.
Having said so, you should keep in mind that most institutions will expect a credit score to be at least “Good” in a FICO range. This means in order to become eligible on most institutions your score should be above 600-670+.
Even though you might be able to find an institution interested in lending you even with a lower credit score, it is highly probable if not definitive that the interest rate at which you would be able to borrow will be ultimately too high. The higher the risk the higher the expected return.
This is a very common question that most individuals ask whenever they review the term sheet of a loan. While many people believe they are the same, in reality, APR is the calculus of the interest rate and also all the fees of disbursement and more. Whenever you see the term APR it actually is talking about the net rate after all the fees.
If there is any topic that generates controversy and discussion about loans is if you should get a fixed or a variable rate. Historically speaking variable interest rate pay less overall than fixed loans. It is important to keep in mind that while this is a representation of past studies, it should not be taken as an indicator of future performance or so.
In order to even have an opinion on the subject, you need to take into consideration how the interest rate is moving in terms of economic policy and economic cycle. Depending on the outlook you might be better off getting a fixed rate if you consider there is a high chance and hikes in interest rates and the opposite if the outlook is pronosticating interest rate cuts any time soon.
Out best advise is for you to talk to your provider and also to your financial advisor in order to get a professional opinion and recommendation on how to proceed.
The first thing that you need to do is to calm down, being overly stressed and anxious will not help the overall situation. It is important that you should pick up the phone or email your lender. By doing so you will be acting in good faith, this can easily help you improve your chances of receiving a fairer treatment or simply to get some sort of leniency.
Keep in mind that most loans and providers will have different prospects and also different approaches on how to deal with this type of situations. Having said so I am 100% certain that you won’t be the first time in this situation, and that you won’t be the last one either.
Since you are the responsible for the loan, and the person that the institution will have to follow in order to recover their funds, it is always better to remain present and become accountable for the situation. Most financial institutions will prefer to give you a deferral period of time or simply make you pay a fee, rather than simply acting against you. A considerably large number of institutions will always prefer to get their money back someone, and still lose the possible interests, then losing the entire account because someone defaulted.
This is a situation where good communication and honesty will take you furder.
There are literally hundreds of other alternatives but the real question should be why you want an alternative. Is it because your credit score is not good enough? If this is the case, then payday loans and even some secured loans might be your best alternatives. The market is broad that you might even be able to get an unsecured credit card with a small balance as a start.
If the reason to aim for an alternative is to simply find something that might fit better, you might want to take your time and actually review how a secured loan might work as a better alternative. Depending on your assets and also the amount of money you are willing to spend in the loan, lowering the beta of risk for the loan might be your best option.