How to apply for an unsecured personal loan
When applying for an unsecured personal loan, you will need to fill out a form with some important personal information about yourself. You will likely be asked to provide supporting documents.
Here are some types of documentation you may need to bring with you when applying for an unsecured personal loan:
- Government issued photo ID. This could be your driver’s license, other government-issued ID, or a U.S. passport. You may be wondering why a lender requires such IDs. Lenders have a duty to ensure that no one else is pretending to be you and taking out an unsecured loan on your behalf.
- Your social security card (or a copy of it). Your Social Security number is the easiest way for a lender to check your credit history and creditworthiness.
- Proof of income. Bring your latest W-2s and pay slips or 1099s if you are self-employed. Lenders may also want to see your recent bank statements, especially if you are self-employed.
- The routing number of your bank and the account number to which the unsecured loan proceeds are to flow. Some lenders offer a discount if you agree to have your loan payments automatically debited from your bank account. Therefore, you need this information for this purpose as well. The deposit and payment accounts do not necessarily have to be identical.
- Your most recent tax returns. Not all lenders want these, but having them available anyway is a smart idea.
How much interest do you pay?
The interest rates on unsecured loans can vary widely: A lender may offer unsecured loans with interest rates between 7% and 36%. Unsecured loans can offer a lower interest rate than you would get on a credit card, but only if you can get a loan with a low interest rate.
These factors that determine your interest rate when applying for an unsecured loan:
- Your lender’s interest margin.
- Your creditworthiness. This is the most important factor in determining your interest rate.
- Your other debts, your income and your professional career.
- The length of your unsecured loan term. All other things being equal, shorter loan terms usually yield better interest rates.
- Your loan amount.
- Whether you consent to automatic payment. Many private lenders offer a small interest rate cut if you agree to automatically pay your loan payments.
Fees and other costs of unsecured personal loans
Many personal lenders pride themselves on not charging any fees at all, while others come with various costs. Here are some fees that you may encounter when purchasing an unsecured personal loan:
Origination fees: This is a fee that is charged when taking out a personal loan. Many lenders with lending fees will deduct these from the proceeds of the loan. In other words, if you borrow $ 10,000 with a $ 200 processing fee, you can expect $ 9,800 to appear in your bank account.
Prepayment penalties: Although these are quite rare, there are prepayment penalties. These are fees that a lender charges you when you decide to repay your loan early. The reason for this is that the lender expects a certain interest income with the lending. Since your lender will not receive all of the interest income on a prepayment, a prepayment fee is intended to make up for this somewhat.
Late Pay Fee: Many private lenders charge an additional fee when payments are late. Late payments can also lower your credit score. Getting stuck with a late fee and hurting your credit score is a double blow, so only take out an unsecured loan if you are absolutely certain that you can make the monthly loan payment.
Do You Need High Credit To Get An Unsecured Loan?
No. There are several personal lenders who specialize in providing loans to consumers with average creditworthiness. For example, personal lenders
Avant accepts borrowers with poor credit ratings and above. Other lenders such as upstart and Lending Point also accept borrowers with mediocre credit scores.
To be clear, you probably won’t get a single digit interest rate on your unsecured loan unless you have good credit. However, personal loans can still be great financial tools for borrowers with less than great credit scores.
Can Unsecured Loans Be Good For Your Credit Score?
Yes, an unsecured loan can improve your credit score. Typically, credit bureaus see personal loans as “better” than credit card debt. Shifting your debt from credit cards to personal loans can greatly improve your credit score. When you use an unsecured loan to consolidate credit card debt, you may find that your credit score is improving.
As a personal example, I took out a personal loan a few years ago to consolidate some credit card balances. Although the dollar amount of my debt did not change, my FICO® Score shot up 30 points shortly after I closed the loan.
Unsecured Personal Loans vs. Credit Card Fund Transfers and 0% Introductory APR Offers
An unsecured loan can be a clever way to consolidate credit card debt and pay personal expenses. However, this is not your only option. For example, there are several credit cards on the market that offer promotional 0% introductory APR periods of 18 months or more.
So what is an unsecured loan? It’s a loan that can be used to pay for projects that need to be completed to consolidate debt and, if you are careful of it, build your creditworthiness.