Introduction
The trend of unsecured personal loans is ascending rapidly, but people are still confused about their functioning. The theme of this article will be 13 misconceptions about unsecured personal loans and present you with the verified information you need to make an informed decision.
What is an Unsecured Personal Loan?
Definition
An unsecured personal loan is a loan without any guarantee, that is, the lender is not being protected with a property. Rather than the lender approving the loan based on your creditworthiness, income, and other financial characteristics, it reviews these and makes its decision.
How It Works
Once you have made an application for an unsecured personal loan, the lender will assess your credit history, work status and level of income. In case you pass the test, they’ll provide you with a loan with a fixed interest rate and repayment period. You will then get a lump sum amount, and you will make fixed monthly payments until the loan has been paid off its total amount.
The 13 Myths About Unsecured Personal Loans
Myth #1: They Have High-Interest Rates
The myth that unsecured personal loans come with overwhelmingly high-interest rates is one of the most widespread beliefs about unsecured personal loans. Yes, the truth is that unsecured loans’ interest rate can be even higher than that of secured loans since there’s no collateral, but not very high, especially if you have good credit.
There are many banks offering such rates, and the easiest way to look for the best deal is to shop around for the most competitive prices. Furthermore, some banks offer discounted rates on loans for debtors having a top-notch credit score.
Myth #2: You Need Excellent Credit to Qualify
While having a good credit score can certainly help you qualify for better interest rates and loan terms, it’s not always necessary to have excellent credit to get an unsecured personal loan. Some lenders cater to borrowers with fair or even poor credit, though the interest rates and fees may be higher.
The key is to shop around and compare offers from different lenders to find one that suits your credit profile and financial situation.
Myth #3: They’re Only for Emergencies
However, it is important to note that personal loans are not limited to emergencies as commonly believed, and they can be used for many different reasons. Many a time, these funds are used for debt consolidation, house remodelling, weddings, vacations, or even to support business ideas.
The versatility of unsecured personal loans makes them an alternative financing option for different objectives and purposes.
Myth #4: You Can’t Use Them for Debt Consolidation
Debt consolidation has become one of the main reasons why individuals choose to take unsecured personal loans. Combining several debts, which can be in the form of credit card balances or other loans, into one loan with a lower interest rate could potentially help you reduce interest and make your monthly payments more manageable.
But, it’s recommended to have a strategy set up so that one can stay free of new debts while paying off the consolidation loan.
Myth #5: The Approval Process is Complicated
The approval process for unsecured personal loans is usually simple and can be completed by using the web or going to a bank or credit union in person. The lenders generally ask for basic details like employment and income details, and they also do a check on your credit history.
For some loans, you can be approved and have access to the money within a few business days; that is why unsecured personal loans are one of the financial products you can easily access.
Myth #6: You Can’t Get a Large Loan Amount
The unsecured personal loan amount, which depends on the lender and your credit score, can be as much as you need. It is also possible to obtain larger loan amounts, even without collateral. Some lenders offer unsecured personal loans up to $100,000 and more to clients who qualify for the loan.
The amount of loan you can access will be determined by your salary, credit score and overall financial situation.
Myth #7: You Need Collateral
By definition, unsecured personal loans do not require any collateral. This means you don’t have to put up your home, car, or other assets as security for the loan. The lack of collateral can make unsecured personal loans a more accessible financing option for many borrowers.
However, keep in mind that without collateral, lenders may be more stringent with their credit and income requirements.
Myth #8: You Can’t Get One with Bad Credit
While having a good credit score can improve your chances of getting approved for an unsecured personal loan and receiving a lower interest rate, it’s not impossible to get a loan with bad credit. Some lenders specialize in working with borrowers who have less-than-perfect credit.
That said, you may face higher interest rates and fees, and the loan amount you qualify for may be lower. It’s essential to shop around and compare offers from different lenders to find the best deal for your credit profile.
Myth #9: They Have Short Repayment Terms
Unsecured personal loans can have a wide range of repayment terms, from as short as a few months to as long as several years. The repayment term you qualify for will depend on factors like the loan amount, your creditworthiness, and the lender’s policies.
Longer repayment terms can help make the monthly payments more manageable, but they also mean paying more in interest over the life of the loan.
Myth #10: You Can’t Use Them for Major Purchases
Regardless of the type of unsecured personal loan, it is unlikely to be an appropriate choice as a financing source for purchasing a home or a car (which are normally secured loans), but it can be used for other major purchases, such as home remodelling, medical expenses or even a wedding.
The primary point is to make sure you can afford to repay the loan on a monthly basis and that this purchase is consistent with your overall financial objectives.
Myth #11: They’re Inflexible
Loans which are not secured with any collateral can be pretty flexible, depending on the lender and the different circumstances that you face. Some lenders may offer you the chance to skip a payment or extend the repayment period if you have financial difficulties, while others may let you make extra payments or even pay off the loan before the due date without extra charge.
The conditions and the terms must be read in detail, and the flexibility offered by each lender should be reviewed.
Myth #12: They’re Risky
As with any other financial product, there is a degree of risk in unsecured personal loans, but they aren’t generally riskier than any other type of loan. You can use an unsecured personal loan as long as you do not borrow beyond your capacity and you make timely payments. This situation is an excellent financial tool.
The source of danger is usually excess borrowing or loaning more than you can repay. You should carefully assess your financial state and be sure that you borrow an amount which you will not have difficulties returning.
Myth #13: They’re Only for People with Low Incomes
his myth is most definitely a big fat lie. Personal loans can be unsecured, and they can be given to borrowers on different income levels, for example, from low to high. It is a fact that most lenders are attracted to people who have steady, higher paychecks, which in turn are more stable and have a good track record of paying their debts because they are perceived as being low risk in this regard.
The loan amount and the terms for which you will qualify will depend on your entire financial profile, not just your income level.
Conclusion
Unsecured personal loans could be a stellar financial tool that one could use to consolidate a debt or to make a purchase that is major and beyond. We hope to shed light on these 13 common myths, and at the end of this reading, you will have a better insight into how unsecured personal loans work and whether it is the right way for your financial situation.
Make sure you do your homework, check out multiple lenders and, most importantly, think hard about your ability to pay back this loan before making this decision. If you do it right, a personal loan that is not collateralized can be a very good and hassle-free money-lending option.