The Ultimate Guide to Unsecured Loans

Borrowing money is never easy, and there’s always a good reason behind taking out a loan.

A loan is an obligation to pay money (at times, an item) at a future date. Loans can be secured or unsecured. Some unsecured lenders help you get the needed capital firsthand without putting up collateral or paying high-interest rates. It makes it easier for you to repay your debts without worrying about the debt ever going into default.

Among western countries, New Zealand has one of the most productive economies, which is a good indicator of the growth of unsecured loans there. And this explains why New Zealand increased the number of loans issued last year.

If you’re looking for an unsecured loan, check out our guide.

What’s an Unsecured Loan?

Unsecured loans are a form of short-term lending and the most common type of credit you can get. They’re also known as signature loans or good-faith loans. They do not need a cosigner and collateral, so they are easy to qualify for, which is an added advantage. However, your credit history and score will decide whether you’re eligible.

Unsecured loans are availed for a variety of purposes. They help you meet your unexpected expenses and needs efficiently.

Types Of Unsecured Loans

There are four main types of unsecured loans:

1. Unsecured Personal Loans

Unsecured personal loans are the least expensive of all the unsecured loans and the most common. They are also called “traditional” loans as they serve various purposes, from medical bills to home renovation and vacation. You only need to make monthly payments until maturity.

Keen on getting personal loans? If you’re in New Zealand, explore the best Personal unsecured loans provider in NZ and apply with ease.

1. Personal Lines of Credit

It’s a form of revolving credit that allows you to borrow money whenever you need it, up to the amount of your limit. Once your line opens, it can be utilized as often as necessary by repaying the balance in full or in part over time. Lines may also come with penalties if they are not repaid on time. So, this can be helpful if a large debt is due and you need cash at once but cannot get money from other sources.

1. Unsecured Credit Cards

Unsecured credit cards give borrowers access to more spending power. With an unsecured card, you can make purchases without paying anything upfront. Unlike a secured loan, however, you must be able to pay off your balance entirely each month or else pay some added fee.

1. Student Loans

Student loans are a great way to finance your education. Unlike other unsecured loans, student loans have a fixed interest rate and repayment schedule.

Unsecured Loan Lenders

The common types of unsecured loan lenders are:

1. Online Lenders

These are the most popular type of unsecured loan lenders. They provide services on their website or mobile app and do not require physical meetings. These companies also offer lower interest rates than other lending institutions because they do not have to pay high overhead costs associated with physical locations such as rent, staff wages, etc.

1. Credit Unions

These lenders offer loans to borrowers who do not qualify for funding from other financial institutions. These are locally based in your community and accept online and in-person applications. Membership is mandatory for getting loans through credit unions.

1. Banks

Besides other financial institutions, many local and national banks also offer various unsecured loans.

Unsecured Loan Features

1. Unsecured Loan Amount and Tenure

The range of an unsecured loan is from $1000 to $100,000. Your lender may cap your total debt at a certain amount and make you pay back the rest in monthly payments, or they might provide you with a line of credit that can be utilized as needed.

Unsecured loans are available for a shorter term than secured loans. Unsecured personal loans are available for one to three years, while some credit cards can last five years or more.

1. Interest Rates

Unsecured products mostly come with higher interest rates as they are riskier than secured products. Moreover, interest rates on unsecured loans can vary significantly from lender to lender. However, you can be offered a low-interest rate if you have a reliable credit history and credit score.

1. Terms and Conditions

Different lenders have different requirements and terms for unsecured loans, so you should look at the fine print to avoid surprises. Also, ensure no hidden fees or charges are attached before signing anything to avoid any unexpected costs.

How Do Unsecured Loans Work?

The unsecured loan process involves multiple steps, which are listed below:

1. Check your credit score

The credit score usually ranges from 300 to 850, with higher scores indicating better credit standing. If your credit score is good, you can get low-interest rates while getting an unsecured product. You can get your credit score checked through various online free tools.

1. Evaluate your budget

You should have a stable income and expenses. Your income should be sufficient to cover your monthly expenses, including payments on any loans or credit cards.

1. Shop for lenders

The best way to find a lender is by using an online search engine like Google/Bing (or even googling “loan broker”). Once you find a few potential lenders that fit your needs, make sure they offer online applications before reaching out directly with questions about their loan products and services offered.

1. Pre-qualification

Pre-qualification is a soft credit check. It does not affect your score, as it’s just an estimate of how much you can borrow. The only thing that happens when you prequalify for an unsecured loan is that your lender will decide if they want to offer you the loan based on your financial situation and risk tolerance levels.

1. Loan application and approval

The application process is quick and easy. Some lenders offer an online-based decision-making process that takes minutes to complete, while others may require you to send a paper application.

The lender will look at your bank statements and credit report before approving your loan request. The approval process is fast, and you can apply online within 24 hours or less.

1. Loan disbursement

After approval, your money will be deposited into your bank account directly from their website or app. Some lenders offer same-day funding, while others may require you to wait a few days before it gets deposited.

Unsecured Loan Default

If you default on your unsecured loan, the lender will send your payments to a collection agency. The collection agency will then try to get you to pay by calling and sending communication letters.

The bank may take legal action against you if you do not pay up. You could have your salary garnished, or assets seized if you cannot repay the loan.

A defaulted loan can cause considerable damage to your credit score. Lastly, it can appear on your credit report for five years, thus harming your credit history.

Conclusion

Unsecured loans are a popular way to get out of debt and build your credit history. They are flexible and easy to apply for but come with certain risks. If you are considering this type of loan, it’s important to research beforehand to make an informed decision.