A record 19.3 million Americans had at least one unsecured personal loan as of 2019, according to the Federal Reserve Bank of St. Louis. Outstanding balances on those loans exceeded $143 billion—up $26 billion from 2017.
Powered by fintech lenders, the unsecured personal loan market has grown rapidly over the past few years. It’s a trend that’s expected to continue.
It’s because unsecured personal loans offer borrowers a myriad of benefits, such as debt consolidation and the ability to make purchases without the use of a credit card (which could have higher interest rates). Money from such loans can also come in handy if you encounter the unexpected, such as an emergency room visit or a job layoff.
Since unsecured personal loans have only recently surged in popularity, many consumers don’t fully understand them. In this article, we’ll go over all you need to know and explain how you can get an unsecured personal loan.
Unsecured personal loans are loans made from financial institutions to individual borrowers. They can be used for a variety of purposes. However, they’re generally not meant for expenses like paying college tuition or buying a home or car. Common uses of unsecured loans include:
To obtain an unsecured personal loan, you don’t need collateral. Other common loans, such as auto loans, have collateral (The car itself!). With a mortgage, the collateral is the house.
Additionally, unsecured personal loans are amortized loans. As Investopedia notes, amortized loans have scheduled periodic payments that include both interest and principal. Typically, each payment is the same amount, with the loan paid off after a set number of months or years.
You can make the process of getting an unsecured personal loan quick and easy by preparing in advance. Follow these steps to increase your chances of being approved:
Having all the necessary info on hand will streamline the application process. To apply for a personal loan, you will most likely need:
Note: Lenders generally do a soft credit check to see if you pre-qualify for an unsecured personal loan. Soft credit inquiries don’t affect your credit score. That allows you to see potential rates and terms before going through the final application process.
When looking for potential lenders, make sure of the following:
Tip: Go to AnnualCreditReport.com and get your annual free credit report. Find out where you stand so that you only apply with lenders who are willing to work with you
For apples-to-apples comparisons of unsecured personal loans, check the annual percentage rate (APR). The APR is the annual cost of borrowing and includes all interest and fees, including origination fees. You’ll find that APRs for unsecured personal loans can differ dramatically.
By shopping around and comparing multiple offers, you can save lots of money.
Additionally, keep an eye out for loan fees that could be assessed later and add to the cost of borrowing. For example, a prepayment penalty could cost you hundreds of dollars if you choose to repay a loan early. At Personify Financial, we don’t charge prepayment fees.
Narrow your choices down to a few based on which lenders suit your needs and who offer the best rates and terms. Then, apply with the right lenders for you.
Thanks to modern technology, you can get pre-qualified in minutes. As long as you provide all the necessary information, you should also find out whether you meet eligibility requirements within minutes (though it could take longer). If you’re qualified, you’ll see the loan amount, rates, terms, and monthly payments you may get with that lender.
Before completing the formal application, determine which lender has provided the best offer for you. Consider rates and terms first, but also look at other factors, such as monthly payments and the lender’s reputation.
When you formally apply for an unsecured personal loan, the lender will do a hard credit inquiry. This will impact your credit score slightly.
The lender may take one to two business days to underwrite the loan. Some online lenders may complete underwriting within just a few hours. It all depends on the lender and the information you provided.
If you’re approved, you’ll agree to the rates, terms, monthly payments, and conditions of the loan. Then all that’s left to do is wait for the money. It should take between one and three business days to show up in your account.
By preparing and shopping around for the best rates and terms, you can improve the odds of getting the best possible unsecured personal loan. If you have time before you apply, know you can take steps to get an even better unsecured loan.
For example, you can get better rates and terms if you do the following:
To conclude, do your due diligence. The right personal loan may not only save you money—it could also put you in a position to improve your financial well-being.