Major expenses, such as a home remodel or a daughter’s wedding, can cost you more than what you have in savings. A personal loan could be your answer. If you are looking to save money by paying down high-interest credit cards debt, an unsecured personal loan might be the right choice. Before you apply for an unsecure loan, make sure to fully understand the risks and benefits, as well as possible alternatives to borrowing.
What is an Unsecured Personal loan?
There are many options for unsecured personal loans. These can be obtained from credit unions, banks, online lenders, and peer-to-peer lending sites. Personal loans are generally available for whatever purpose you want, though some restrictions may apply. Your creditworthiness, along with other factors, will determine whether or not your loan application is approved.
Unsecured personal loans are a type installment credit. You repay the loan over a fixed amount of time with a specific number of monthly payments. Typically, you will need to begin making monthly payments on the loan once the funds are received. The lender will usually send the money to you directly. However, if the loan is to pay off credit cards debt, the lender might send the money to those credit card companies.
An unsecured personal loan can help you improve your credit score by increasing your credit mix. Your credit mix is 10% of your FICO(r).
Unsecured vs. Secured Personal Loans
There are two types of personal loans available: secured and unsecure. To get a secured loan, you must pledge collateral–something of value that the lender can take if you don’t pay the loan. Secured loans include auto loans and mortgage loans. These loans are secured by the car or home you finance. If you default on the loan the lender can foreclose your house or take possession of your car. A secured personal loan may require you to pledge collateral, such as real estate, bank accounts, investments, insurance policies, art, or other valuables.
Secured loans are less risky for lenders because the lender has collateral to fall on in the event of default. It can be easier to obtain a loan for those with less-than-perfect credit. Secured loans can offer higher loan amounts and lower interest rates, as well as better terms than unsecured loans.
A secured loan has one major drawback: you risk losing your collateral if the loan is not paid.
There are pros and cons to unsecured personal loans. The lender will take on a greater risk and you might not be able borrow as much money. An unsecured loan will require you to have better credit than a secured loan.
Unsecured loans have a huge advantage. The best part about an unsecured loan is that you can get the money you need without putting your home or other assets at risk.
What happens if you default on an unsecured loan?
While defaulting or missing payments on an unsecured loan will not affect your credit score, it can have a significant impact on your credit. Your credit score is largely affected by your payment history. Missing even one payment could have a significant impact on your credit score.
The lender will notify the borrower if you fail to make a payment. Usually, this happens more than once. They may also give you a grace period of 30 days to bring your account up to date. If you do not make your payments, the lender may send your account to their in house collections department or transfer it into a third party collection agency. The past-due payments are reported to credit bureaus, and appear on your credit report.
Lenders will attempt to get payment from your in any way possible. They may even file a lawsuit to collect the payment. Your original debt with the lender might show up in your credit report as a charge-off. This indicates that the lender has failed to collect and is giving up. The collection agency account will be listed on your credit report separately.
Even if the debt is paid off, collection accounts remain on your credit report for seven year. An account in collections can negatively impact your credit score and make it difficult to get credit approval in the future.
Alternatives to Unsecured loans
There are many options available if you have difficulty getting an unsecured personal loan. Secured personal loans are available. It can be difficult to obtain an unsecured personal loan if you don’t have a good credit rating or are rebuilding your credit. A secured personal loan may be the best option to get you the money that you need. A secured personal loan might be a better option if you are looking for a lower rate of interest than an unsecured loan. Remember that defaulting on a secured personal loans can not only affect your credit but also cause collateral loss. To ensure you are able to manage the monthly payments, it is important that you carefully review your budget before applying for a secured personal mortgage.
Borrow money from family and friends. Sometimes, the closest place to borrow money is your own home. Are there family members or friends who could lend you the money? If you do, make sure you put the loan in writing just like you would for a bank loan. Also, take responsibility for repayment. If you do not, your relationship could be at risk.