What is an Unsecured Personal Loan
An unsecured personal loan does not require a lien against your home, property or auto. The lender is using you're personal guarantee backed by your current credit score, employment history, and repayment history. The loan is repaid in installments over a set number of months at an agreed upon monthly rate.
What is a Lien
If a lender has a lien against your assets, it is considered a secured loan and the lender has the right to take possession of the asset until the loan is fully repaid.
An installment loan is a loan amount repaid over an agreed upon the number of months. Personal loans are installment loans that have a fixed repayment term usually from two to seven years and often carry a fixed or variable interest rate plus fees that vary by lender. The interest expense and fees combined become the annual percentage rate or APR.
You’ll receive your loan amount in a lump sum up from the lender and then repay the loan along with the interest in regular monthly installments. Personal loan lenders provide a breakdown of fees and loan term before you sign the final loan documents.
Interest Only vs Annual Percentage Rate (APR)
The interest rate quoted by the lender is the cost of borrowing money. The annual percentage rate or APR includes the interest expense along with all fees charged by the lender. These fees could include application fees, origination fees or prepayment fees. When you receive your loan offer, these fees will be broken down in detail for your approval. If you do not see this breakdown, contact the lender before continuing with the loan application.
Information Required to Apply for a Personal Loan
- Your credit score
- Credit history
- Current employment information
- Debt to income ratio also referred to as DTI
- You will need to be 18 years old to apply
- A checking account
- A US citizen, permanent resident or in some cases a working visa
Compare Unsecured Personal Loan Lenders
Important Steps When Searching for Best Unsecured Personal Loan
Determine what and why you are applying for the loan and ask yourself if you really need this money? Is there any other way I can purchase this big ticket item or repay my existing loans and credit cards without borrowing more money? It is very easy to want something and make an emotional purchase and our society promotes immediate gratification. Check yourself.
Household Net Income
Knowing how much money you bring in as a household, how much you spend for daily living and how much you have over will determine if you can manage additional payments. If you are applying for a personal loan to consolidate debt, use a personal loan calculator to determine if this new loan is manageable. If it is just another payment which will leave you cash poor, then you may want to postpone applying.
Your credit Score determines how much money we can borrow, the term and the interest rate. Our credit score is something that we should protect our entire lives as it dictates our creditworthiness. If you have collections and /or bankruptcies on your credit report and your credit score is below 620, lenders will have to determine the risk they are willing to take when lending money. If you have not paid your bills and other loans on time, they will consider you a higher risk of not having the loan repaid. The better your score, your credit history, the easier it is to find an unsecured personal loan. You will also be offered better interest rates and better terms. If your score is below 620, you may want to rebuild your score before applying for another unsecured personal loan. Credit Scores range from 280- 850. Scores from 725 and higher are offered the best rates and terms. Under 600 is considered fair to poor credit and you are limited as to lenders, rates and terms.
Debt To Income Ratio or DTI
Before you apply for a personal loan, you will want to know if you can manage the new monthly payment. This new loan payment, combined with what you are already paying on your existing debt, is referred to as your debt to income ratio or DTI. If you are taking a debt consolidation loan, make sure to calculate the new payment, less everything you are planning on paying off. This link will connect you to an article explaining more about debt to income and a DTI calculator to find out if you can manage the new monthly payment.
Will This Loan Application Affect My Credit Score?
Most providers start with a soft credit pull and the lenders normally advertise this on their site. The lender will usually require a hard pull before they finalize the loan.
What Can We purchase with an Unsecured Personal Loan
You can use an unsecured personal loan to finance a variety of expenses including debt consolidation, auto purchase, home repairs, medical expenses, weddings, and vacations. If you're planning a major home renovation, you may want to consider a secured loan.
Unsecured Personal Loan for Debt Consolidation
It is very common to take out a personal loan and use the funds for a debt consolidation loan. If you have credit cards that you unable to pay off every month and the interest is above 20%, it is a wise step to consolidate this debt into a personal loan. If you are only making the minimum payment now on your credit card, a debt consolidation loan will start the process of reducing debt every month.
Secured or Unsecured Personal Loan
Unsecured personal loans can be more difficult than a secured loan. A good credit score is required when the loan is not secured by assets or collateral. The most common assets used for security are home equity and vehicle refinance. You may pay higher interest rates with an unsecured personal loan in comparison to a secured loan. We have added options below on secured and unsecured loans.
Loan Interest Charges
Interest rates for unsecured personal loans start near 5% with a credit score above 720. Interest rates can go as high as 35.99% if the borrower's credit score is near 590+. Some lenders charge origination fees and closing costs. The interest cost and additional fees make up the Annual Percentage Rate (APR) of the loan.
When credit scores are below 590, an unsecured personal loan above $1,000 may not be an option. There are lenders that specialize in bad credit loans that can help with financing with poor credit.
Criteria for finding the Best Unsecured Personal Loan
- Best interest rate based on credit score?
- Once you enter your state in the loan finder, lenders that offer loans in that state will appear. You can sort the lenders by APR, Minimum Credit score and Maximum loan amount
- What are the origination fees for applying with the lender?
- Not all lenders charge origination fees. They range from 0-6%
- How fast can you get your loan and is their information easy to understand?
- Check the review of each lender when you find the loan provider that meet your requirements
Credit Score Chart
This credit score chart is designed to help estimate interest rate offers. There is a calculator at the bottom of the page to calculate a loan payment. Applying for a personal loan with a lower credit score is expensive. It will raise the interest rate and in many cases, shorten the term of the loan. If your credit score is not where you want it to be, apply with Novita to improve your credit score first.
Co-signed Personal Loans
If you are struggling with getting an unsecured personal loan, we have a loan provider that specializes in co-signed loans. Freedomplus offers to co-sign in the states listed below.
Auto Loan Refinancing
Used auto loans are often purchased with an unsecured personal loan. Here is a lender that offers loans for purchasing a new or used car, refinancing an existing vehicle or buying out an existing vehicle lease.
If the timing is right, adding a loan amount to your existing mortgage is another option to consider other than an unsecured personal loan. If your mortgage is up for renewal and you've built up some equity, this may be a great solution.
Secured Home Equity Loan or Home Equity Line of Credit
Secured loans and lines of credit are protected with assets and provide the lenders the ability to increase the borrowing amount, lower interest rates, and work with a lower credit score. The main advantage of a secured loan is that you can access more capital when you use an asset to secure the loan. Secured loans require collateral and the process can be longer as the collateral must be verified by the lending institution. This step can be well worth your time when you receive lower interest rates.
A home equity loan will provide lower interest rates and we would recommend either a loan equity loan or Home Equity Line of Credit (HELOC) if you have the time to wait. For many people that have just purchased their home or if the equity is not available to secure a home equity loan, an unsecured personal loan can get the job done and it can be completed very quickly.
Renovating your home can be one of the best ways to increase the value of a property. A home equity loan, home equity line of credit, refinancing your home or applying for an unsecured personal loan is four great options.
Refinancing your home, a home equity loan and a home equity line of credit (HELOC) loan amount will be based on the equity in your home. Your home will require an appraisal to determine it's new value. Mortgage providers will take a look at your current debt to Income Ratio (DTI) and determine the amount of risk they will take with your home's equity. We have seen lenders range from 65% to 80% of your properties value.
If your home is valued at $400,000 today, some lenders will offer you a new mortgage up to of your property value 80%, while another lender will offer you 65%. The lender will look at your DTI and your credit score to determine if you can manage the new monthly payment.
Renovating a Home has been one of the Best ways to increase Property Value
As we update this article in September 2018, the research that we have been seeing on remodeling and spending trends are still as strong today as they were in 2016. In the article attached from Harvard University, they are discussing spending levels and trends with remodeling in 2016. The graph below shows strong trends going forward. This is important to us as we were caught in a downturned market for many years and have been cautious in moving forward with additional spending.
Mortgage Refinance, Home Equity Loan or Home Equity Line of Credit
The difference between your current property value and your mortgage is your equity. You are normally charged an appraisal fee and possibly a fee for setting up the HELOC or home equity loan. If you have been in your home for many years, the equity should be available for you to use for a home equity loan. If your mortgage is up for renewal, this is a great time to increase your existing mortgage instead of creating the credit line or HELOC.
You may also want to talk to your accountant or tax advisor about writing off the interest on the renovation costs. Not all Interest payments on home equity loans and HELOC's are tax deductible so make sure you do your research. Here are the links to connect to over 1,500 lenders offering home refinance, home equity and HELOC.
Personal Loan or unsecured credit line vs a Home Equity Loan, Refinance or HELOC
Home equity loans can work for you:
- The interest on the new loan may be tax deductible
- The interest rate on the HELOC and home equity loan are typically very reasonable with good credit
- You can spread the cost out over a long period of time and retain more of your savings
- You could add the new renovation cost to your existing mortgage if you start the work when your mortgage is up for renewal
- Depending on your renovation size, your work schedule and timing with contractors, a personal loan is done in days where a home equity loan could take a few weeks to complete.