Unsecured personal loans are loans that are not guaranteed by collateral, such as property or other assets, and are instead issued solely on the creditworthiness of the borrower. These factors can make unsecured personal loans — also called signature loans — relatively risky bets for lenders. In order to get a lender to issue this kind of loan, the borrower is generally required to have excellent credit.
This risk also means that unsecured personal loans typically come with interest rates that are higher than those levied on secured loans, but not as high as many credit cards. This makes them attractive to borrowers who want a personal loan to pay off debt or finance large purchases at lower rates. Since an unsecured personal loan can be expensive, it is important to find the best rates and the most favorable terms.
Finding Low Rates on Unsecured Personal Loans
Banks, credit unions and peer-to-peer lenders all issue personal loans — but the rates and terms can vary wildly between different institutions. Large, national banks are often the most selective and least likely to work with borrowers who have spotty credit.
Community and local banks are generally less convenient, with fewer ATMs and branches, but often compensate by offering better rates and more personal customer service in order to compete. Similarly, credit unions are nonprofit, member-owned institutions often offer their members better rates than banks. Membership is based on varied criteria, such as occupation, residency or military service.
Since online banks do not assume the overhead associated with physical branches, such as employees and security, they are often able to offer lower rates on loans. Peer-to-peer (P2P) lenders enable borrowers to bypass traditional financial institutions altogether and borrow directly from investors, who buy into loans with rates that are based on the borrower’s creditworthiness.
Avoid “bad credit” personal loans or any personal loans in which lenders are not concerned with credit history. These subprime loans are often predatory in nature and come with extraordinarily high interest rates that can actually perpetuate long-term debt, since the interest charged often ends up costing more than the original loan.
How to Get an Unsecured Personal Loan With Low Interest
More than virtually any other type of loan, an unsecured personal loan rate depends on the borrower’s credit history and credit score. The single most important step a borrower can take to securing a loan at a favorable rate is to improve his or her credit score.
The major credit bureaus base your score on five
criteria, according to myFICO.com :
- 35 percent of your score is based on your payment history.
- 30 percent of your score is based on credit utilization.
- 15 percent of your score is based on the length of your credit history.
- 10 percent of your score is based on new credit.
- 10 percent of your score is based on your blend of credit.
First and foremost, pay your bills on time, every time. If your credit has been damaged by late payments or missed payments in the past, the next important step you can take is to improve your credit-card utilization rate by paying down credit-card debt. You should shoot to owe less than 10 percent of your available credit, but anything under 20 percent won’t hurt your credit score.
After you work to improve your credit, you should look for the best possible rate by comparison shopping.
Researching Unsecured Personal Loan Rates
According to the Consumer Protection Financial Bureau, you should do your loan shopping in a timely manner. When credit inquiries for loan applications are filed in quick succession, credit bureaus can generally see that the borrower is shopping for the best rate as opposed to seeking several new loans at once, which can damage your credit. Any hit to your credit score will be minor, and well worth the benefit of finding a better rate.
Look for fixed-rate loans, which are loans with rates that do not change throughout the life of the loan. This is preferable to variable-rate loans, which often have lower introductory rates but can raise rates dramatically and unexpectedly, making it difficult for borrowers to predict payments from month to month.
Watch out for origination fees — which can be less than 1 percent to as much as 5 percent — as well as late payment fees and fees that charge for certain methods of payment, such as checks. Also, ask about fees associated with refinancing or paying the loan early. “Some lenders may charge fees or prepayment penalties, which should be considered when deciding to refinance,” said Todd Nelson, business development officer at LightStream. the online lending division of SunTrust Bank.
People interested in unsecured personal loans should start on a site like PersonalLoans.com, which gathers information on the borrower’s needs, and pairs them with third-party lenders based on the data they collect. It is up to the borrower, however, to shop around, to be mindful of scams, to research the lenders and choose the best rate.