An unsecured personal loan lets you borrow funds without using an asset such as your home equity or your car as security. Keep in mind that for most personal loans, you’ll need a credit score of 650 or higher to be approved. This means you’ll need to have a good to excellent credit score. Find out if an unsecured personal loan is right for you by reading more in our guide below.
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You can usually use an unsecured loan for any legitimate and legal purpose. However, when you apply for the loan, you may be asked to list why you are applying for it, and the lender may take your reason into account when deciding whether to approve your loan or not.
When completing your application, you’ll also need to list how much you want to borrow and choose your loan term. Unsecured personal loans offer varying amounts of money, usually between $1,000 and $35,000. Loan terms usually range between one and seven years.
You’ll find that unsecured loans tend to come with interest rates that are higher than secured loans because the lender is taking on more risk allowing you to borrow the money without putting up collateral. These loans can also come with administrative fees, monthly fees and annual fees, so be sure to check any additional fees that you may be charged before you apply. It’s important to know just how much your loan will cost you.
Unsecured personal loans can have fixed or variable interest rates and repayment restrictions differ between lenders – you may be able to make additional repayments and repay your loan early without facing a penalty, depending on your loan and the lender.
Why is the interest rate usually higher on an unsecured loan?
Interest rates on unsecured loans are usually higher for borrowers than they are for secured loans because the lender is taking on more risk, since you are not putting up any collateral, like your car or equity on your home. If you default on the loan, you’ll have paid back more interest than on a secured loan. If your loan is secured, the lender can take the asset you’ve used for collateral to recover the outstanding amount still owed.
How to compare unsecured personal loans
Before you apply for a loan, it’s important to compare different lenders and loan options in order to find the best loan for you. Here are some factors to keep in mind when making your comparisons:
Minimum and maximum loan amounts. Many lenders will set a minimum and maximum you can borrow – these usually vary between $1,000 and $35,000, however it can sometimes be higher.
Fees and charges. You can be charged both upfront and ongoing fees with unsecured personal loans, so check what these are before you apply. You can look at the APR to see an overall cost for the loan which includes these fees.
Additional features. Your loan may come with additional features that you might find convenient, such as online account management or discounts on additional products offered by the lender.
Pros and cons
No asset needed for security. When getting an unsecured personal loan, there’s no need to supply an asset, like your home equity or your car, as security. Additionally, if you’re purchasing an asset with your loan, you won’t have to risk it either.
Flexible loan purpose. You can use the funds for a wide variety of legitimate and legal purposes, subject to the lender’s restrictions. When you apply for the loan, you will likely be asked to list your reason for needing it.
Easy application process. Applying for one of these loans is usually quite easy and can be done online or in person if the lender has a physical store. You can usually get a pre-approval response quickly after applying, though a firm offer will require verification of your information.
Higher interest rates due to no collateral being offered. Since the lender faces a greater risk because the loan is unsecured by collateral, the interest rates are generally higher on unsecured loans. You can expect to pay relatively high interest rates.
Mistakes to avoid
Lying about what you need the funds for. Always be upfront with your lender about why you’re applying for the loan, whether it is for business purposes, to consolidate debts or to cover some bills.
Getting into too much debt. If you’re taking out an unsecured loan to consolidate existing debts, you should be wary of getting yourself into financial trouble by increasing your debt load. Make sure you’ll be paying less with this new loan than you’re paying on your current debts.
Check that the lender providing your loan is legitimate. Always make sure you’re getting a loan from a trustworthy lender. Don’t fall prey to any loan scams, especially in the online world.
Fees and charges. Where possible, always do your best to avoid excessive fees and charges. One way to do this is to make sure you do your research, ask questions and compare different loans and lenders.
How to apply for an unsecured personal loan
If you think an unsecured personal loan is the right choice for you and your financial situation, compare different lenders and loans on offer until you find the right one for you. Once you find a loan that you are eligible for that meets your needs, you can either apply online or in person if the lender has a physical store location.
If applying online, head to the lender’s website and start the application process. This usually takes less than ten minutes if you have all of the necessary information on hand. You will need to provide:
Personal details. Your full name, date of birth, address, phone number and email.
Financial details. Your bank name and transit number, as well as your personal account number.
Employment details. You will need to provide proof of employment or income by providing pay stubs or bank account statements from the last 90 days.
Typically, to get an unsecured personal loan you’ll need to meet a range of eligibility criteria set by the lenders, including:
You must be at least 18 years old, or the age of majority in your province or territory.
You’ll need to be a Canadian citizen or a permanent resident with a valid Canadian address.
You must have a credit score of 650 or higher, and be able to provide proof that you can pay off the loan by providing pay stubs or bank account statements.
You’ll also need to verify your identity.
You will usually need a working bank account if applying online.
Frequently asked questions
No, a legitimate lender should not ask you to pay any funds upfront. In many provinces, it is actually illegal for a lender to request any money upfront. If a lender charges an origination or processing fee for a loan, they will typically deduct it from the loan amount. If a lender is asking for a prepaid card loaded with funds or for you to pay loan insurance, you should look elsewhere for a loan – it’s likely a scam. You should also be aware that loan insurance is never required.
Some lenders may allow you to use the funds from an unsecured personal loan for business purposes, but others will not. You may need to apply specifically for a business loan. Contact a lender to find out more.
There are two reasons this might have happened: A lender may operate on a tiered-rate system where your rate is determined by the information in your application, or the lender found you to be a higher risk borrower, so applied a higher interest rate to your account.
While unsecured personal loans generally come with higher interest rates than secured personal loans, you can still find a competitive, low rate option. Compare different lenders and loans in order to a find an interest rate that fits your preference.
Aliyyah Camp is a writer and personal finance blogger who helps readers compare personal, student, car and business loans. Aliyyah earned a BA in communication from the University of Pennsylvania and is based in New York, where she enjoys movies and running outdoors.
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