Unsecured personal loans can provide you the money you need for almost any purpose. You can use the cash to fund your home renovation project, start a business, or use it for any major purchases you want. However, before you take out an unsecured personal loan, it is vital to understand how this type of loan works.
Unsecured Personal Loans: The Basics
You can take out an unsecured personal loan from a variety of lenders. It includes banks, credit unions, peer-to-peer lending platforms, and online lenders. This type of loan tends to have fixed interest rates and set monthly payments.
When it comes to unsecured personal loans, the lender will not require you to put up any property or collateral to secure the loan. With a secured personal loan, the loan is guaranteed by a property. So, if you fail to repay the loan, your lender can repossess your property and sell it to collect what you owe.
It’s not the case when it comes to unsecured personal loans. Since you don’t have to pledge collateral, this type of loan is less risky for you. Also, the consequences of non-repayment of the loan are not as immediate as with a secured personal loan.
An unsecured personal loan is riskier on the lender’s part. They are left with no option to recover if you fail to pay the loan back. However, they still have other options to pursue repayment from you, for example, taking legal action against you. They can also attempt to garnish your wages. And, since unsecured personal loans provide more risk to the lender, interest rates are typically higher than secured personal loans.
Your credit score is an essential factor in determining whether or not your loan application will be approved. If you have strong credit, you will most likely snag a loan with a lower interest rate. Moreover, you might also have plenty of loan options available.
On the other hand, if you have bad credit, you will not have as many options. You might also need to have a cosigner to improve your chances of getting approved. On the bright side, some lenders offer unsecured personal loans to borrowers with bad credit. To know more, you can check out Creditninja.com.
Check Your Credit
Your credit score is a significant factor that can determine your unsecured personal loan approval. If you haven’t checked the status of your credit score for quite some time, then it is best to do it. Always remember to review your credit scores and credit report before you apply for any loan type to take a glance at where you stand.
What If You Default On An Unsecured Personal Loan?
If you miss or default on your loan repayments, an unsecured personal loan will not take away any collateral. However, it will most likely hurt your credit score. It’s because your payment history plays a massive role in your credit score.
If you miss a payment, the lender will let you know about it. It usually takes more than once, and the lender might give you a grace period (typically 30 days) to bring your account current. However, if you fail to meet the lender’s demands, your account will eventually be sent to collections.
Your lender might have their in-house collection department or send your account to a third-party collection agency. Either way, the past-due payment of your loan will be reported to the credit bureaus. Moreover, the missed or default payments will show on your credit report.
As mentioned, there are still options the lender can take to get payment from you. Filing a lawsuit against you is one. After your debt has been sent to collections, the original account you have with the lender will manifest on your credit history as a “charge-off.” It suggests that your lender has not collected anything from you and has lost hope. By then, your collection agency account will show up on your credit report as a separate account.
Collection accounts tend to stay on your credit report for several years. It can stay up to 7 years even if you have already paid off the debt. Having your account in collections has a huge impact on your credit report. Furthermore, it can pull down your credit score, which makes it hard for you to get a loan approved in the future or take out a loan with a lower interest rate.
In A Nutshell
Unsecured personal loans are a type of loan that you can use for almost any purpose. Additionally, this type of loan does not require you to pledge any collateral. Because of this, unsecured personal loans are considered less risky on the borrower’s part but riskier on the lender’s part.
