An unsecured personal loan doesn’t require you to put up any assets as collateral. However, lenders will be stricter with loan applications and conditions because the loans are unsecured.
Here are some of the most common kinds of unsecured personal loans, how they work, as well as their benefits and risks.
Signature loans are standard unsecured personal loans. You can be approved for a signature loan without putting up assets as collateral. All you typically need is to give the lender your personal information and your signature.
If you are successfully approved for a signature loan, you will need to sign a loan agreement. Afterward, you will receive a lump sum deposit to your bank account. You can use these funds for various purposes.
Signature loan eligibility
When you apply for a personal loan, a lender will assess your eligibility based on numerous factors. They will usually look at the following:
- Your credit score (good credit is 670+)
- Income information
- Proof of employment
- Identification documents
Note that if you have bad credit, it can be extremely hard to be approved for an unsecured personal loan.
Signature loan benefits
Easy to apply: Because the list of requirements is short, it’s easy to apply for a signature loan as long as you are willing to provide your signature. As long as you have good credit, the application process is relatively seamless.
No collateral: Not needing to offer assets as collateral to a creditor reduces the risk to a borrower. Even if you are late on your payments or default on the loan, you won’t automatically lose any collateral.
Flexible fund usage: With few exceptions, the money that you get from a signature loan can be used for almost any purpose. This flexibility makes it great for financing large purchases or handling emergencies.
Signature loan disadvantages
Credit requirements: Lenders will check your credit history and score to see whether you meet their loan requirements. Even though it’s easy to apply for signature loans because of a relatively simple process, it can be hard to get approved if you have poor credit.
Higher interest rates: Lenders undertake more risk because you don’t need to give up anything as collateral–a signature is enough. To manage risks, lenders will often charge higher interest rates on unsecured signature loans.
Default consequences still present: If you default on your signature loan, a debt collector agent may sue you or otherwise try to recover your outstanding balance. Your credit score can also take a severe dip, making it much harder to procure a loan in the future.
Line of credit
Lines of credit are flexible unsecured loans that you can obtain from a bank or financial institution.
What makes lines of credit different from other personal loans is that they often use _variable interest rates _instead of fixed. The variable interest rate is generally based on the Federal Reserve’s prime rate, which is influenced by current market conditions such as inflation, demand for loans, and the federal funds rate.
While lines of credit may be convenient for you in the short term, their variable rates may lead them to be a worse long-term choice due to their relative unpredictability.
Credit card loans
Also known as a credit card cash advance, a credit card loan allows you to borrow against your current credit card limit. Over the course of the agreed-upon repayment term, you will pay the loan back.
To obtain a credit card cash advance, you can go to an ATM and use your credit card to withdraw money even if that money isn’t in your bank account. The amount you can take out as a loan is dependent on your credit limit, and there is typically a transaction fee.
While a cash advance is a convenient way to borrow money, it is often thought of as an expensive method due to various fees and high interest rates.
Credit card loan uses
Useful for emergencies: If you’re short on funds and need money urgently, a credit card cash advance can be a convenient way for you to secure what you need.
A good issuer gives competitive rates: Depending on which card issuer you have, you might be able to secure good terms and rates for your cash advance. If you have multiple credit cards, review your cash advance options before you commit to a particular issuer.
Credit card loan disadvantages
High APR: Credit card loans may have higher annual percentage rates (APRs) than other kinds of loans.
No grace period for interest: When you withdraw money, that’s typically when you start accruing interest. While other kinds of personal loans may grant you a grace period, a credit card cash advance may not.
Transaction fees: When you take out a credit card loan as a cash advance, you can expect to pay a transaction fee. A transaction fee may be either a flat fee of around $10, or a percentage of your cash advance. The exact fee amounts can vary based on your credit card issuer. If you think you might need more money later on, it could be advantageous to take out a larger amount of cash instead of conducting numerous smaller value transactions. This is one way to avoid paying a flat transaction fee several times.
Limited loan amount: The amount of money you receive from the cash advance will be restricted by your remaining credit card limit.
Credit score impact: Taking out a cash advance on your credit card might hurt your credit score, at least temporarily. Your credit score can be improved after you repay the advance in a timely manner.
A payday loan is a short-term unsecured personal loan, meant to provide you with a decent lump sum to tide you over until you receive your next paycheck. After you get paid, you will have to repay the loan according to the repayment terms.
How does a payday loan work?
If you want a payday loan, you need to find a lender and make an application. Lenders require you to provide documents such as your proof of income, government-issued ID, and other relevant information.
After being approved, you’ll need to sign a loan agreement. You will typically be expected to repay the loan amount on your next payday–hence the name “payday loan”. Since the loan tenure is so short, payday loans have very high interest rates and you can’t obtain a large loan amount.
Is a payday loan good or bad?
While everyone’s financial situation and needs are different, payday loans may not be optimal for you due to their notoriously high interest rates and fees. If you need fast funds but have poor credit, it’s advisable to consider alternative personal loans and credit options first.
The advantage of applying for a payday loan is that many lenders won’t require you to have credit or good credit, so if you have bad credit, you can still be approved. However, payday loans can be problematic for borrowers due to their unfavorable terms, such as very high interest rates. If you decide to take out a payday loan, make sure you carefully review the conditions of your loan agreement.
Peer-to-peer (P2P) lending is a financial technology that enables you to borrow directly from another individual. This kind of loan is also referred to as crowd lending or social lending.
What is the purpose of P2P lending?
With P2P lending, there isn’t a financial institution like there is in a typical personal loan. Instead, there are P2P lenders who can connect with borrowers on lending websites, which set general terms and conditions for all the loans.
Borrowers who opt for peer-to-peer lending are usually those who wish to obtain a loan from an individual as opposed to a financial institution. These borrowers may not have credit history or they may have poor credit scores.
On the other hand, P2P lenders may be investors who want to gain better returns with their savings, since P2P interest rates may be more favorable than the usual savings account rates or certificate of deposit terms.
Are P2P loans safe?
As with any kind of loan, borrowers may default on peer-to-peer loans. There is usually more risk and more reward on the individual investor’s part in the case of a P2P loan.
Crowdfunding involves receiving funding through donations. There are many different kinds of crowdfunding. Here are the ones you should know.
Business owners can try to obtain debt-based crowdfunding, which works similarly to a loan for businesses. A “crowd” of investors can all pitch in to help give you funds for your needs. You will then be expected to repay the crowdfunded amount over time, including any interest and fees.
Perhaps the most widely known kind of crowdfunding is donation-based. Those who are crowdfunding for a goal may receive money for their needs and goals. Depending on what platform is used or what conditions were agreed to, you might need to return the money if you fail to complete the ultimate crowdfunding goal.
You may have heard of Kickstarter, where projects are funded every day. Platforms for reward-based crowdfunding enable you to attract investors by offering tiered rewards for donating money to you. These rewards can be anything from products to services.
When is crowdfunding a good idea?
For businesses who want to secure funds for crowdfunding, this kind of process can help you connect with customers, avoid common loan fees and interest rates, and quickly raise the money you need without having to go through the usual lender eligibility checks (e.g. a credit check).
For individuals who need money for a purpose that resonates with others, such as paying for surgery costs, crowdfunding may also be a valuable way to spread the word and receive funds without having to worry about repayment.
Salary advance loans
A salary advance loan lets you borrow money from your employer in the form of a salary advance. The amount of money you receive will be automatically deducted from your future wage.
Compared to other kinds of loans, payroll advances usually have much better terms for you. This is because employers usually want to maintain a good relationship with their employees, and companies also aren’t allowed to make money off of these salary advances.
Still, an employer may charge a minimal fee or interest rate for the sake of covering administration and accounting costs. If you need money to finance an urgent need and you know you will have enough if you get money from your future paychecks sooner, a salary advance can be a fantastic way to cover your expenses.
In case of an emergency, an emergency loan may be able to provide you with the immediate funds that you need. Emergency personal loans allow you to cover unexpected expenses by depositing money into your bank account.
Emergency loans are typically $1,000 or under. They may be good for:
- Urgent medical expenses
- Unexpected home repairs
- Pressing bills that need to be paid
Depending on which lender you send your loan application to, the terms, conditions, and requirements can vary greatly. Take note of the details in your loan agreement before you put your signature on it. Some emergency loans can be challenging to repay due to their high interest rates.
Microloans are available to businesses that are seeking “micro” loan amounts for businesses, usually up to $50,000. They may be a good funding option for startups. Interest rates range from 2% to 18%, and the conditions for microloans vary depending on your lender. Microloans are generally long-term loans going up to 10 years.
Business owners may also be able to obtain a microloan from the government’s MicroLoan Program, which helps small business owners pay for various business expenses (excluding debt and real estate purchases).
Other unsecured loan types
There are numerous other kinds of unsecured loans that are used for more specific or niche purposes. Some of the specialized loans you might encounter are:
- Green loans: Eco-friendly loans used for green projects, like installing solar panels
- **Medical loans: **For medical expenses
- Wedding loans: For wedding expenses
- Adoption loans: For covering adoption agency fees and other related costs
- Cosmetic surgery loans: For surgical costs that aren’t covered under medical needs
- Career development loans: For those who want to finance their career training programs
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