Unsecured Personal Loans: Borrow With No Collateral
Updated: Aug 3, 2022
An unsecured personal loan doesn't require you to pledge any collateral.
An unsecured personal loan is money borrowed from a lender that is not secured by property such as a house or car over a fixed period of time.
What credit score is needed for an unsecured personal loan?
There isn't one definitive score that's sure to get you an unsecured loan. But according to Experian, if your score is 670 or higher, you should be able to shop more lenders and look for a loan with a competitive rate.
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Steps to Acquiring an Unsecured Loan
If you have decided that the best route for you financially is getting an unsecured loan, then there are several steps you should follow during the process.
Step One: Always educate yourself on the basics of unsecured personal loans and find out the amount range you will be able to borrow.
Step Two: Get your free credit report and scores and see what your current credit rating is. If it is lower then you will most likely be denied and will have to try for a loan that is secured with collateral.
Step Three: If you still want to get the unsecured loan, but your credit rating is less than ideal, then now is the time to pull all of your credit reports from each of the three major credit reporting bureaus and see what you can do to increase your score and improve your creditworthiness.
Step Four: Before getting an unsecured personal loan, it is recommended that you pay down any existing debt you may have and make sure that you continue to pay your bills on time.
Step Five: Next, you will apply for the loan through a major bank or other financial institution. If you already have an institution in which you bank, then you should go there first because you have already established a relationship with them.
Step Six: if you have a lower credit score, you can always apply through an online lender, but make sure to read over the tips above, so you are not met with a scam or fraudulent loan process. Also, keep in mind the interest rate on an unsecured loan you obtain online might be much, much higher.
Step Seven: Protect your identity and yourself. Only meet with reputable institutions that have no sordid history of lawsuits or fraudulent activity. Never pay any money in advance for a loan you apply for either.
Step Eight: Don’t be afraid to look around for the best interest rates. You do not have to settle on the first offer. Don’t worry about affecting your credit by doing this either. It will be known that you are shopping around for the best rates for the single loan application, so your credit score will not be impacted by several different hard inquiries.
If you have a higher credit rating, then you can qualify for the lowest rates available.
Step Nine: When you are satisfied with the terms and interest rate and are comfortable with the lender, you can then submit your application along with proof of your identity. This is needed to make sure that you are who you say you are and so they can pull your credit history. You will also need to verify both your current address as well as verification of your annual income.
Step Ten: Once all the paperwork is in place and all the verifications that are needed have been submitted, you will verify the amount you wish to borrow, set up security questions, gain a clear understanding of what debt-to-income ratio means, and then focus on the terms of repayment. Make sure you are aware of all loan repayment options as well as the conditions and rules that may be in the fine print. Also, be sure that you will be able to afford the monthly payments.
Differences between Secured and Unsecured Loans
There are more differences between secured and unsecured loans than putting up collateral. Because of the higher risk involved with unsecured financing, many lenders increase interest rates and require higher credit scores to receive unsecured financing. Even if you have established a good credit score, a lender might ask for collateral to secure the personal loan if it is more than what the financial institution normally approves. If you put up collateral worth about the same amount of money as the personal loan you have applied for, you can expect the loan approval process to take less time to complete.
Below is the FICO score range that most financial institutions use to assess the probability of you paying back the loan on time:
800 to 850 = Excellent
740 to 799 = Very Good
670 to 739 = Good
580 to 669= Fair
300 to 579= Poor
As mentioned earlier, individuals with excellent credit scores often qualify for unsecured personal loans of high loan amounts and low interest rates. Therefore, if you currently have a poor credit score, it would be best to improve it before applying for an unsecured personal loan.
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