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6 Tips for Unsecured Loans

What you'll learn: What to consider when using an unsecured personal loan


It used to be that many major purchases you couldn’t cover – or didn’t want to cover – with your savings had to be made with a credit card. Today, more financial institutions are now offering unsecured personal loans, which are a financially savvier option for a one-time purchase or debt consolidation. A common and predictable monthly payment is much easier to budget for. Unsecured loans allow you to borrow money for nearly any reason, whether it’s a wedding or that vacation you’ve had your eye on for months. Unlike a secured auto loan, an unsecured loan doesn’t require any property as collateral. If you are considering a big purchase other than a house or a car, here are six things you should know:

1. Think beyond home improvement.

When most people think of unsecured loans, they think of home improvement loans. But you can actually take out a personal loan for any reason, whether it’s a need or a want. At PenFed, we’ve given personal loans for everything from medical bills and funeral expenses to vacations and musical instruments.

2. You don't have to disclose your purchase.

I’m often asked whether you have to identify the reason for your loan in order to qualify for it. The answer is no. You can apply for, qualify for and receive a loan while fully maintaining your privacy. And taking out a loan shouldn’t be a source of embarrassment. People don’t always have the current cash to cover unexpected expenses. Taking out an unsecured loan is a much more responsible move than a payday loan or taking on too much credit card debt.

3. Look beyond banks.

Your bank might not offer unsecured personal loans – many banks don’t. Instead, consider online lenders or credit unions. Credit unions can offer competitive rates because they’re not-for-profit, which means profits go back to borrowers in the form of better rates and lower fees. When you’re evaluating a lender, make sure there are no hidden fees, or miscellaneous opening or closing costs. Your loan should have no origination fees and should be available immediately. Also look at net promoter scores, which measure the loyalty of a company’s customer base. An NPS score can be a good guide as to how happy borrowers are with their lenders.

4. Make sure you have great credit.

Your credit is one of the most important factors in qualifying for an unsecured loan. Personal loans are considered riskier loans, so requirements are more stringent. Generally, credit scores of 700 or above allow you to qualify for better rates and higher loan amounts. Your debt-to-income ratio – how your monthly debt payments compare to your income – should be below 45%. There’s no quick fix for low credit scores. But paying all your bills on time, paying off debt every month, and carrying a low credit card balance (or no credit card balance) will raise your score over time.

5. Consider refinancing your student debt.

Many people don’t know that most student loans are also unsecured loans. Rates for student loans are much higher while you’re in college than they are after you’ve graduated and you’re earning income and establishing good credit. You can save hundreds of dollars on your monthly payments simply by refinancing to a lower interest rate.

6. Consolidate your loans.

Every year millions of U.S. consumers use unsecured loans for debt consolidation of high-interest credit. If you’re feeling overwhelmed by multiple debt payments, or you want to lower your monthly payments, you can combine unsecured debts into one lower, fixed-rate loan. Make sure you find a lender that doesn’t charge a prepayment penalty, in case you are able to pay it off early.

While taking on debt is never anyone’s first choice, it’s helpful to know that there are a growing number of flexible and low-interest options out there to help cover big costs – whether it’s something you didn’t anticipate, like a car repair, or when you’d rather not touch your savings or investments. You can’t put a price on that kind of peace of mind

Jay Fee is Vice President of Unsecured Lending at PenFed Credit Union.

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