Your Guide When Considering an Unsecured Personal Installment Loan

When it comes to borrowing money, knowledge is power. You want to know who you’re borrowing from, what your interest rate is, how long you have to back it back, and how much your monthly payments will be. But you should also be informed when it comes to what type of loan is best for your circumstance and how the loan works. If you’re searching for unsecured personal installment loans, you’ll want to learn as much about them as possible while comparing rates.

An unsecured personal installment loan can help you get the money you need quickly to pay off medical bills or keep you from losing your house, but do you know enough to make a wise decision when it comes to borrowing from a lender?

This article will help you answer the following questions:

  • What is an unsecured personal installment loan?
  • What is an installment loan?
  • What’s the difference between a secured and an unsecured loan?
  • What can you use a personal installment for?
  • How does a good vs. bad credit score affect your interest rate and loan options?
  • What personal loan interest rates should I expect?

What are Unsecured Personal Installment Loans?installment loan

There are times in our lives when we risk losing the things we love the most: our homes, investment properties, or our cars. Other times, we feel like we’re drowning in credit card statements and the interest that comes along with them. This can create an immense amount of worry and stress. During these situations, we will do almost anything to keep our lives intact, but you want to make wise choices. An unsecured personal loan, may be the difference between keeping your home and reducing credit card debt.

When you need money, but don’t know where to turn, many people choose to take out an unsecured personal installment loan. This type of a loan can get you money upfront when you need it without putting your personal property on the line. Also, an unsecured personal loan can often be paid out within 24 hours and repaid over the course of 2 to 7 years, which can lessen the burden of needing to repay your loan immediately like at a payday loan service which can take advantage of a person in a desperate situation.

What is an installment loan?

There are two types of loans: revolving credit and installment credit.

Revolving credit is probably a more familiar system than you realize. If you have a credit card, you already use revolving credit. Revolving credit has a spending limit or borrow limit within a statement period, but you can often request a higher spending limit. This form of ‘loan’ allows the borrower to charge money, pay it off, then charge more.

When a borrower uses revolving credit, they usually have a minimum payment that stays the same from month to month, but their overall payment may be different depending on how much they spent. And they are often charged a set interest rate on how much they borrowed but didn’t repay within the statement period.

Unlike installment loans, a revolving loan does not have an endpoint for repayment. You can have a credit card open for two years or two decades and pay off debt you accrued during the first month you opened the line of credit.

An installment loan is what most people normally think when it comes to loans. With an installment loan, the lender loans the borrower a lump sum up front, then the borrower pays the loan back over time in set monthly payments. The borrower is also charged interest which is added to the sum they owe the lender. This type of loan is called an “installment” loan because the borrower gets an installment of money then repays it back in set installments. Unlike credit cards, installment loan have an end date for payments.

Personal loans, student loans, car loans, and mortgages fall into this category. Installment loans can be a great option for people trying to improve their credit scores because the monthly repayment amount is always the same therefore it can be easier to budget for and manage. They also add diversity to the type of loans you have.

So what makes a loan “secured” vs. “unsecured”?

As you’re looking at different loan options, you may see that some are secured while others are unsecured. While “secured” tends to have a connotation of being more stable or less risky, this doesn’t necessarily apply to the borrower.  These words simply describe whether or not the borrower must leverage their loan with physical property.

An unsecured loan doesn’t require the borrower to borrow ‘against’ something they already own or are purchasing. An unsecured loan has no collateral connected to it. This means that the lender cannot take away or repossess your belongings if you stop making payments. Of course, not repaying a loan will drastically harm your credit and leave you legally liable for the debt, but you won’t have your home foreclosed on or your car towed away in the middle of the night.

When it comes to secured loans, they require that the borrower forfeit their home, car, or other valuable possessions if they don’t repay the amount they owe. The ability to repossess property makes these loans less risky since people don’t want to lose their homes or cars. The lower risk often means that secured loans are usually easier to obtain and less risky for the lender. These factors often mean that secured loans have lower interest rates and are more readily available for people with good and bad credit. Mortgages and auto loans are the most common forms of secured loans.

What is a personal loan?

Most people have heard of student loans, car loans, and home loans, but not everyone has heard of a personal loan.A personal loan is an amount of money borrowed from a lender like a bank, online lender, or your local credit union. They can range in amount from $500 to $70,000.

With a personal loan, you’re not limited by what you can spend the money on, like you would be with a student loan, car loan, or a mortgage. This makes personal loans a popular choice for credit card consolidation or medical debt consolidation. Personal loans are also frequently used for weddings and vacation expenses.

Banks and lenders will look at a borrower’s financial wellbeing and history to decide how much they can reasonably lend them and how high a borrower’s interest rate will be. Which means that your credit score is a major factor in obtaining a loan with a low-interest rate and the amount of money that you need.

What Can You Use Your Personal Loan For?

Personal loans don’t restrict what you can spend the money on. Students loans must used to purchase a limited list of university-related items like textbooks or school supplies. When it comes to personal loans, you don’t have these restrictions. You can purchase what you need with the money when you need to.

A lot of people use personal loans for unexpected medical expenses. These include co-payments, prescriptions, physical therapy, surgery, dental expenses, cosmetic surgery, breast reconstruction, vasectomies, and vasectomy reversals.

Others use personal loans for unplanned emergencies. These include funerals, travel to spend time with a sick loved one, emergency car repairs, and as a source of funds when a person becomes unable to work.

But many people use personal loans for planned expenses that carry a high price tag or have limited time deals, like vacations, to consolidate debt, pay for a wedding, to manage bills after losing their jobs, and blips in the stock market.

So, what is an unsecured personal installment loan?

An unsecured personal installment loan is loaned money that didn’t require the borrower to attach their car, home, or property to receive the loan, and that they will repaid over the course of 2, 3, 5, or 7 years. An unsecured loan can often range anywhere from $500 to $70,000 and come from one of many lenders.

How Does a Good vs. Bad Credit Score Affect Your Options?

A Quick History of the Credit System to Illustrate How Credit Scores Work

Sometimes, the notion of credit is easiest explained by thinking of credit in a historical sense.  While we have digital services now to track and check credit, we didn’t always. There is evidence of credit and loans that date back to 3500 BC, but the American credit score system originated in the 19th century when R. G. Dun and Company established a system to keep track of how “creditworthy” companies were.

But the notion of ‘credit’ when it comes to individuals was also unrelated to the idea of a score for a very long time–it was a reputation. When a person was waiting for their crops to be harvested, they would still need day-to-day groceries like milk or beef, so their grocer would let them have these items ‘on credit,’ which meant they paid for them once they harvested their crops and had income. While many shop owners didn’t charge interest, some capitalized on their ability to ‘loan’ their customers goods by charging a fee or interest.

Well, in a system where people bought eggs on credit, it was vital to maintain a reputation that you could repay the loan, otherwise, you would go hungry. So, people earned reputations for being “creditworthy.” If you can imagine if ‘credit worthiness’ was given a number or a  score, you would have what we recognize as today’s credit score system. In fact, the American credit score system was invented and established by Retail Credit Company, now known as “Equifax,” in 1899.

Now, with the availability of online lenders and credit cards, we rely on the FICO credit system to keep track of how creditworthy we are when it comes to borrowing money. The FICO system was founded in 1956 as a way to fairly and mathematical evaluate a lender’s risk for giving money to a borrower compared to others. Essential, it answers the question of how likely a borrower will repay their loan in full and in a timely manner based on how they’ve behaved in the past.

Today’s Credit System and Scores

Nowadays, your credit plays a vital role in securing the best loan. People with ‘good credit’ are less risky than those with ‘bad credit’ so banks and lenders usually provide them with lower interest rates while being able to lend larger amounts of money.

They use the same system started over one hundred years ago to tell lenders how risky you may be as a borrower. Think about it like this: the more likely you are to run off and not repay a lender’s more, the more risk you pose–the lower your creditworthiness score will be. The higher your credit score it, the less risky you appear to a lender. You build a higher credit score by proving over time that you are creditworthy.

Because most credit card companies make money from transaction fees, they want to entice borrowers with good credit scores by offering rewards and lower interest rates. Because risky borrowers may not pay their debt back, credit card companies can decline to open lines of credit for bad credit borrowers or they offset their risk with higher interest rates.

High-interest rates are also a way to capitalize on people with low credit scores since they are more likely to carry a balance and pay interest on their spending. The same is true when it comes to online lenders and banks when comparing personal loans, mortgages, and car loans.

Do You Know Your Credit Score?

Knowing how healthy your credit score can help you improve your credit score or help you take advantage of the benefits people with good credit are often awarded.

The factors that go into your FICO score are:

  • Payment History        35%
  • Amount Owed            30%
  • Length of History       15%
  • New Credit                  10%
  • Types of Credit           10%

These numbers reflect:

  • how often you pay on time
  • how long you’ve been borrowing
  • how much you owe against how much money is available for you to borrow
  • how many lines of credit you recently opened
  • how many types of credit you have.

After you check your credit score, you may be surprised to learn that your score is either higher than you expected or lower. Some people aren’t sure how their credit score stacks up.

FICO credit scores can be as low as 300 and as high as 850. Most people have credit scores between 600 and 750. Which can be confusing when it comes to what makes one credit score better versus another. Any score above 670 is considered a good credit score. About 60% of people have good to excellent credit scores.

What does this mean for the other 40%? Well, about 40% of Americans have fair to very bad credit scores. These people often don’t have a long history of using credit or missing payments.

If you fall into the “bad” category, you can work to improve your credit standing by making on-time payments, having a variety of types of credit, and not using the extent of credit offered to you.

What Personal Loan Interest Rates Should I Expect?

Your interest rate on an unsecured personal loan will dramatically reflect the health of your credit score. While comparing lenders will likely result in a wide range of interest rates, you can expect your rate to follow in the following range based on your credit score:

    Score           Interest Rate

720 and up        10% to 13%

680 to 719         13% to 16%

640 to 679         18% to 20%

300 to 639         28% to 32%

How Can an Unsecured Personal Loan Affect Your Credit?

No matter where your credit score falls, you can always improve your score to better reflect who you are as a borrower. You can do this in several ways, but one option is to take out an unsecured personal loan.

A personal loan can help you build your credit history and improve your credit utilization. A personal loan will also add variety to the types of credit you have.

If you’re thinking of consolidation,  an unsecured personal loan can help you manage your debt more easily.

Final Thoughts

In regards to your finances, you should always consider what’s best for your situation and living within your means. If you’re looking to improve your credit score or consolidate your debt, consider an unsecured personal installment loan.

Always look into your lender’s reputation and verify that your income is accurate. Make sure your monthly payments are manageable and reasonable for your income. This will ensure that you don’t get overwhelmed or default on your loan.

There are times in our lives we need extra money to help us survive. Other times, we need funds to help improve our quality of life or be able to get the car repaired to get to work. When these things happen, unsecured personal loans can help get you out of hardship and through stressful financial circumstances.