An unsecured loan is one that doesn’t require you to put down any collateral. Since the lender is taking on more risk, they assess your ability to pay back the loan based on your credit score and income. The worse your credit score is, the higher your interest rate will be – if you get a loan at all.
If you default on an unsecured loan, you will eventually be sent to collections and it will reflect negatively on your credit report and your credit score. Before you pursue a loan of any kind, make sure you are financially able to pay back what you are borrowing.
Credit cards are the most common and available form of an unsecured loan. Most of us are constantly bombarded with offers in our mailboxes and emails, as well as overrun by advertisements on television and other media. While convenient, it is important to use credit cards wisely and pay attention to the details of the contracts you are entering with the companies. The introductory rates can be extremely attractive, but once that period is over, the annual percentage rate (APR) on most cards are quite high! Keeping a revolving balance on a credit card can be quite costly and it is important not to spend past the credit limit.
Personal loans can be taking out from a bank, credit union, or online lender. There are online institutions, across the globe, like STK Finance that are offering assistance. The loans are for a set term (ex. 36 months) and the interest rates are usually better than a credit card. These types of loans have become a popular option for debt consolidation and, when used wisely, are good ways to handle large, financial responsibilities while building credit.
Peer to peer lending is an alternative financial service that matches lenders directly with borrowers. The interest rates can be lower than credit card rates, but can also be just as high depending on your credit worthiness. These loans are also fixed term and the penalties are steep for late payments or payments that bounce back, so it’s important to be financially responsible. They have grown in popularity since coming to the US in 2006-7 and are still on the rise.
If you choose to take out a loan, make sure to consider all the facts with each option. Based on the various fees and interest rates, you will have to choose what is best for your situation. What is most important as a borrower is that you are able to responsibly repay the lender and follow the terms of your agreement.