Understanding an unsecured personal loan inside out
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What is a personal loan?
An unsecured personal loan, also called a signature loan, is a lump sum loan amount given to a qualified borrower. This type of a fixed loan is not secured by a residential property or a collateral.
A personal loan allows you to borrow money to pay off any high-interest debt, fund a significant big ticket purchase, cover any unexpected needs, or for any home improvement project such as adding more square footage, renovating an existing living space or room, or expanding a home by moving walls.
Finding the best unsecured personal loan for your needs, especially if you can acquire a personal loan with a low interest rate, might save you thousands of dollars if you have a good credit score and a stable income.
Prerequisites for sanctioning personal loans
Credit History
Record of timely repayments in the past
Citizenship
Legal US resident
Employment History
A permanent job with a steady source of income
Bank Account
Verifiable account with a reputed bank
Monthly Debts
A low debt-to-income ratio -- usually, below 35%
Credit Score
620 or higher (300-575: Poor, 580-669: Fair, 670-739: Good,740-799: Very good, 800-850: Exceptional)
When should you go for a personal loan?
- A personal loan is the go-to option if and when you want quick cash. The loan type doesn't have any home appraisal requirement from a bank. Hence, the loan approval process is much faster. You don't have to spend innumerable hours on paperwork - as in the case of a home equity loan. Furthermore, a personal loan is a good option if you want a small amount. You can get a loan amounting to as low as $1,000.
- A personal loan is perfect when you don't wish to put your home at risk. This type of unsecured loan doesn't necessitate a collateral as opposed to secured loans such as home equity loans and home equity line of credit. Keep in mind that if your loan is secured against your property, the bank or your loan lender can seize it if you default on your monthly payment(s).
- A personal loan is a good choice if you do not have sufficient equity in your home. Instead of looking at your home's value, your loan lender will analyse your FICO score, credit history, income, and debts at the time of the loan approval. However, always remember that if you do not repay the loan on time, your credit may suffer.
- Personal loans are flexible, and a wise decision when utilized for things that have the potential to enhance your financial situation. These could be debt consolidation or house upgrades.
- This type of loan comes with a fixed interest rate and is ideal for those who like the stability of a set monthly installment. Knowing exactly what they owe helps them plan their home budget and repayment terms better.
How much can I borrow for a home improvement loan?
The maximum amount you can borrow to update your home is about 90% of the market value of the property.
Most home improvement loans are between $1,000 and $100,000. And the interest rates range from just under 6% to around 36% (the higher end is for those with a bad credit score). The loan terms for repayment usually range from 10 to 30 years.
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What are the key features of personal loans?
- Loan Amount & Tenure
The amount of this unsecured personal loan can vary between $1,000 and $100,000. The term or length of the unsecured personal loan ranges from 24 months to 72 months.
- Fixed Interest Rate
A personal loan comes with fixed interest rates/ annual percentage rates, and fixed monthly installments with full principal and interest amount.
- Early Termination Fee
It might come with an early termination fee in the first 12 months and usually offers a limited repository of lenders.
Pros and cons of an unsecured personal loan
The pros
- Simple and quick loan application process.
- No requirement for any collateral.
- Fixed interest rate and monthly payments.
- Lower APRs than credit cards for borrowers with a strong credit score.
- Flexible loan utilization.
- Good for short-term financing needs.
The cons
- APRs can be higher than credit cards for borrowers with a low credit score.
- May have possible fees such as origination fees or late fees — apart from the loan payments.
- May add considerable debt to your budget in the absence of a good repayment plan.
Choosing the best personal loan lender
When you're planning to apply for a personal loan, you must always get the best quotes from loan lenders around you. It helps to keep the following factors in mind when you're comparing potential loan lenders.
- Make sure the loan approval process and requirements are simple enough for you to handle.
- If you have a bad credit, look for lenders that utilize other approval criteria such as income, employment history, or debt-to-income ratio.
- Compare loan interest rates - making sure to include all the fees (origination fees or application fees) or penalties.
- Look for a lender offering multiple repayment options depending on your loan amount.
- Keep an eye out for unique features, perks, as well as loan usage restrictions.
- Investigate the customer service, customer reviews, and online profile of the potential lender.
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