With multiple loan options available today, it can be difficult to remember which qualifications go with which loan, what exactly taking out each loan looks like, and everything that taking out a loan can entail. In order to prevent this confusion, here is a breakdown of everything you need to know for one of the most common types of loans on the market: an unsecured loan.
What Is an Unsecured Loan?
An unsecured loan, put in its most simple terms, is a loan that, when taken out, is not backed by collateral. These loans can be taken out for a variety of reasons and do not have to fulfill one purpose like some other types of loans, such as a mortgage or car loan. Common examples of unsecured loans are debt consolidation loans as well as most credit cards and student loans.
If you default on an unsecured loan, this means that your loan could be transferred to a debt collection agency and it will influence your FICO score.
How Can You Take Out an Unsecured Loan?
One of the first things that you are going to want to do if you decide to take out an unsecured loan is to check your credit score. Let this be the moment to dispel the myth that checking your credit score somehow lowers it; whenever you check your credit score, you are making a soft inquiry about it, and thus you are neither positively nor negatively affecting your score. However, when a lender checks your credit score, things are a little bit different because they are making a hard inquiry and that can sometimes affect your credit score.
For now, focus on your own score. This will give you an idea of the loans that will be available to you based on your score, and could possibly even narrow down some of your lending options based on the health of your credit.
Once you have seen your credit score and used that information to solidify the right type of unsecured loan for you, now comes the other aspects of unsecured loan eligibility. The factors that your financial institution of choice will need to know vary from lender to lender, but some common ones include age, income, employment, and residency. The biggest factor in determining whether or not you will be lent the money is obviously your credit score, however, these other variables will impact such things as your interest rate, and what your billing cycle will look like, which is just as important as getting the loan in the first place. Sometimes, these outside factors can determine whether or not you pre-qualify for certain types of loans, so these are important to keep in mind.
From then on, the process is easy. You will reach out to your lender and apply, then wait for your approval. Depending on what type of loan you took out, you may get your funding in one of many ways. Sometimes the lender will pay your directly, while others will see a few deposits into a bank account. You will know how your loan money is coming to you before the process even begins.
Paying back the loan is the next, and most difficult, part of the process. Stay up-to-date on payments or you could face a higher interest rate and even late fees. However, after this part of the process is complete, you get to close your loan. Typically, you close your loan upon sending the lender your last payment, but that can vary if you decide to pay off your loan early. If that is your route, then you should get in contact with your financial institution to establish the loan closure date and see what loan closure will look like for you.
How Will an Unsecured Loan Impact my Credit?
This question has several different answers, and this is because it depends on your current credit score and the purpose with which you have taken out an unsecured loan. If you have a severely low credit score, then taking out one of these loans may help you raise your credit score as long as you pay your loan on time. This is because a large portion of your credit score is based on financial history, and if you have a history of paying your debts on time, then lenders will be more likely to trust you, and thus, your credit score will increase.
An unsecured loan will especially raise your credit if you have never taken out a loan of this nature before. This also links back to the factors that make up your credit score, as variety of trade lines is another huge part of your credit score, and the greater the variety of lines of credit that you have, then the higher your score will be, because you will have proven yourself capable of managing multiple lines of credit.
Taking out an unsecured loan in order to consolidate your debt will also boost your credit score. Going back to the idea of solid financial history, debt consolidation loans can help make that financial history brighter, faster, because they are typically faster to pay off and are easier for you to manage. Instead of worrying about paying multiple lenders at multiple times with multiple interest rates in mind, you only have to pay one loan back to one lender with one interest rate. Not only will this loan save your credit score, but it will also save you some of your sanity!
Unsecured loans are not one of the big mysteries of personal finance. They are simple to understand, and can have a range of benefits to your sanity and your FICO score if you use them correctly, and pay them off in time. You don’t have to worry about collateral, and you can use them for a variety of reasons, such as paying off debts, using them for your credit card, and paying for your tuition with them. Use them wisely and they will help you get to the financial future that you have always wanted.