Unsecured personal loans inherently have high interest rates. This is because of its characteristics. First, it’s not a secured loan, which means the loan does not have any security collateral. In case the borrower defaults on his payments, the creditor has no other way to collect the amount owed. Hence the investment made on the borrower loses money. And then there’s the fact that unsecured personal loans are less selective when it comes to borrowers. This isn’t to say a creditor will give a loan to a person with no credit history whatsoever. But due to the nature of the unsecured personal loan, the lender will probably allow a person with a less than sterling credit rating to take out a loan.
All of these actually seem to lead to one thing: financial trouble. It seems like an unsecured loan of this kind is a natural debt trap. But it doesn’t have to be. As long as the borrower knows exactly what he is doing and getting into, an unsecured loan can be just as practical as a secured loan.
Here are some pointers on taking out unsecured personal loans.
You should know how to select the best loans
This would entail knowing the factors that could dictate whether an unsecured loan is good or simply exorbitant. First is the interest rate. The interest rate one differs from bank to bank, but different banks also have different interpretations of your credit history. Hence varying interest rates could favor you or go against you. Your credit history is represented by a score, so that’s as definite as you can get. But other banks do their own evaluation, looking into your current debt or open credit lines.
Choosing the best loan will depend on whether you can find a creditor that will offer you a good interest rate for the amount you want, with a schedule that doesn’t prolong your repayment period. It’s a matter of finding the right mix between these three factors. One important consideration here is the amount of money you need, and if you’re open to compromising in this aspect to find a loan that offers more flexible and accessible terms.
For instance, you have to choose between a car loan that offers you a 50,000 dollar principal at six percent interest per annum to be paid in three years and a car loan that offers you a 60,000 dollar principal at 7.5 percent interest to be paid in three years. Assuming that these are the only costs involved, consider the total repayment cost. The first loan will cost you 9,000 dollars worth of interest; the other 13,500 dollars. Is the 4,500 dollar additional cost worth the additional 10,000 dollars you’d get for your debt principal?
Although the example above is of a car loan, the same idea works for unsecured loans and personal loans as well.
Check your credit reports to make sure you’re getting the best interest rates
Many people make the mistake of believing their credit report is accurate. But take note that it may not be, due to two reasons: missing or misinterpreted data or credit/identity fraud.
There are actually instances when the credit bureaus fail to credit debts that you have already paid off. It may be the credit card bill you paid off six months ago or the mortgage you finally completed last year. In any case, you need to make sure your report reflects all of these. Even the slightest financial information can lead to adverse change in your credit rating.
Identity theft is a bigger concern. By checking your credit report, you can find out if someone has been fraudulently using your credit line or your debit card. This can lead to unpaid balances, which, of course, could lead to a lower credit score.
In case you find out that you have been a victim of credit fraud, contact your bank right away to advise you what the next course of action should be. In case of inaccurate credit reports, you can get a credit repair service. This service will help iron out the kinks in your score and submit the corrections to the credit bureaus.
Know the factors that will eventually affect the total repayment rate of the unsecured loan
This pointer can actually apply to other loans as well, including but not limited to home loans, education loans, and renovation loans. Since the amount of money due to the interest rate involved in unsecured loans are very high, it requires thorough consideration.
There are numerous fees usually attached to unsecured loans, and other loans or mortgages as well. The most common additional fee is the processing fee, which usually amounts to one to five percent of the total debt principal. This fee is a payment for the loan processing, usually the paperwork involved in the procedure. Note that some banks and institutions actually charge borrowers a flat rate.
So which is better: the flat rate processing fee or the percentage processing fee? This depends on the amount your borrowed. If your principal is quite high, a flat fee would give you more savings.
Another additional fee that’s hardly considered is the late payment fee. This is an additional payment you need to make in case you end up failing to pay your monthly repayment on time. This could amount to around one or two percent of your monthly payment, to be charged on top of next month’s repayment. A similar fee is the fee for bounced checks. On top of the late payment, you will have to pay an extra fee if your check bounced.
Other fees include pre-payment fees, documentation fees, and early repayment fees.
Again, these fees can also exist in loans such as car loans and education loans. But when you’re dealing with a loan that charges a very high interest rate, you need to make sure that you’re not charged additional fees on top of your already expensive monthly unsecured loan payment costs.