How to Get an Unsecured Personal Loan

Four Parts:Qualifying for an Unsecured LoanChoosing a LenderSubmitting Your ApplicationRepaying Your Loan

An unsecured loan, also known as a personal or signature loan, is issued completely on the creditworthiness of the borrower. The borrower does not need to supply any collateral pledged as security for the loan. Unsecured loans are generally issued to borrowers with high credit ratings.[1] Before applying for an unsecured loan, understand the qualifications creditors require and how to choose the right loan for you.

Part 1
Qualifying for an Unsecured Loan

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    Learn the basics of unsecured personal loans. Amounts for unsecured loans range anywhere from $1,000 to $50,000. People get them to fund any number of endeavors, from credit card consolidation to cross-country moves or even adoptions.[2] Creditors review your credit score to determine if you qualify for an unsecured loan and at what interest rate. Interest rates do tend to be higher for unsecured loans, so plan to pay them off as quickly as possible.[3]
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    Check your credit score. Creditors grant unsecured loans to those with high credit scores. Monitor your credit score and be aware of where you stand before you apply for a loan. Understand that applying for and being rejected for credit negatively affects your credit score. Don’t apply for an unsecured loan unless you’re sure your credit is good enough.[4]
    • Your credit score will determine what kind of lender you should use. A better credit score will qualify you for lower interest rates. Major banks will turn you down for an unsecured loan if your credit score is under 700. Those with credit scores between 640 and 700 may be able to get unsecured loans from creditors who specialize in high-risk loans. However, expect to pay higher interest with these creditors. If your credit score is below 640, do not expect to qualify for an unsecured loan from any lender.[5]
    • Request your credit report for free once per year from Monitor your credit report for errors or inaccuracies, and report any problems immediately.[6]
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    Improve your credit score if necessary before applying for an unsecured loan. If you already have excellent credit, which is a score of 760 or better, then you don’t have to worry about trying to improve your credit. But if you only have fair credit, with a score around 680, take steps to bump it up over the 700 mark before applying for that loan.[7]
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    Make sure all of your bills are paid and start paying down your debt. In the months leading up to your loan application, pay all of your bills on time and pay down your debt. If you have any late payments or other negative items on your credit, wait six months before applying for an unsecured loan to increase your chances of getting it.

Part 2
Choosing a Lender

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    Apply for a loan from a major bank or credit union if you have great credit. Go with a bank with whom you already have a relationship. If you have a checking or savings account or other credit accounts with this institution, they already know you and understand your credit history, spending habits, and income sources.[8]
    • Your excellent credit and your previous relationship with the bank may qualify you for a low-interest rate.
    • Don’t hesitate to shop around with other banks in order to find the best interest rate. Call the bank and ask a loan representative what credit scores the bank requires to get the best rates.
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    Apply with an online lender if you have a lower credit score. Online lenders tend to cater to low-credit borrowers. Also, since their operating costs are lower than a brick and mortar financial institution, they may offer you better interest rates.[9]
    • Online lending marketplaces are also called peer to peer lenders (P2PL). Examples are Lending Club and Prosper.[10]
    • The interest rate they offer will still be based on your credit score. Again, the higher your credit score, the lower your interest rate will be.[11]
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    Protect yourself from disreputable lenders. If you have lower credit, don’t be tempted by lenders who guarantee you a loan despite your credit score. Only consider reputable, state-licensed financial institutions with no history of lawsuits. Also, view their ratings with the Better Business Bureau.[12]
    • Avoid payday loans at all costs. They are designed to keep you in an unending cycle of debt.
    • Don’t fall for advanced fee loan scams. These are lenders that ask you for an insurance fee up front before sending your loan money.[13]
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    Shop around for the best interest rates. This is known as rate shopping. It means applying for a number of loans in order to find the best rate.[14]
    • If you apply for several similar loans at the same time, the credit industry recognizes that you are rate shopping and batches all of the loan applications together.
    • This means that your credit score won’t suffer from applying for too many loans.

Part 3
Submitting Your Application

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    Submit proof of your identity. You will need to provide your Social Security number. This allows lenders to verify your identity and to gain access to your credit history. Lenders will also need to see your passport or your driver’s license or state ID (if you don’t have a driver’s license).[15]
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    Provide confirmation of your living address. To verify your address, you will need to provide copies of recent utility bills, credit card bills, mortgage documents or a copy of your lease. The documents need to have your name on them. Typically, lenders ask that these documents be less than 90 days old. Lenders may also ask for your previous addresses.[16]
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    Include verification of your income. Copies of your pay stubs for the past 30 days will likely be required. Lenders tally your total salary or hourly wages to determine your monthly income. They want to be sure that you have enough income to make the monthly payments. They may also request certain tax records, such as your W-2 forms for the past two years.[17]
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    Submit information about any other current debt. Other debt obligations may include student loans, car loans or credit card bills. This is another piece of information that helps the lender evaluate whether you will be able to make monthly payments on the loan. If your other debt obligations are too high, this may weaken your chances of getting the loan.[18]
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    Create security questions. For security reasons the lender might ask you a question to which only you would know the answer. For example, you may have to provide your mother’s maiden name or the name of a favorite pet. These security questions help identify you when you contact the bank to discuss information about your loan. They help to keep your financial information private.[19]
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    Specify the amount you want to borrow. Tell the lender how much you need to borrow. The lender will want to know specifically how you will spend the money. Also, you will need to state how long you need to pay the money back. Plan to borrow only the exact amount you need and to pay it back as quickly as possible. This way you avoid excess interest payments.[20]
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    Understand your debt-to-income ratio. Your debt-to-income ratio affects your credit score. This looks at the amount of debt you have in relation to your total gross income. When deciding on a loan amount, be sure to borrow only what you need in order to keep you debt-to-income ratio as low as possible. Aim for a debt-to-income ratio of less than 36 percent.[21]
    • For example, if you earn $6,000 per month, you want to keep your total debt payments to less than 36 percent of this amount, or $2,160 ($6,000 x .36 = $2,160). Plan to borrow an amount that keeps your total monthly debt payments close to this amount.

Part 4
Repaying Your Loan

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    Understand the options for repaying your loan. You may choose to make monthly payments on your loan. Or you may want to pay the loan off in full all at once. Discuss your repayment options with your lender. Understand the conditions or rules that govern how your loan must be repaid.
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    Choose an amortizing loan for regular monthly payments. Most personal loans are amortizing loans. This means you pay a fixed monthly amount that includes interest and principal. The number of months needed to repay the loan is specified at the beginning. You continue to make monthly payments until the loan is paid off and the balance is zero.[22]
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    Understand interest-only loans. This means that each month you only pay interest on the loan. The principal is paid in one lump sum at the end of the loan. The regular payments are smaller with this type of loan, so you would choose it if you think you don’t have enough income to cover amortizing loan payments. Also, it may be possible to refinance the lump sum payment at the end with another lender.[23]
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    Ask for a balloon payment loans if your current monthly income is low. With balloon payment loans, you pay no monthly payments during the term of the loan. Then, at the end, you pay the entire principal plus all of the accrued interest in one lump sum. This is a risky type of loan. Many people who choose this option think they will be able to refinance the lump sum payment with another loan at the end.[24]
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    Avoid late fees. If you don’t pay your loan according to the terms and conditions set forth by the lender, you may incur penalties or fees. These may occur if you miss a payment or pay your bill late. The late fee will be added to your monthly payment for that month. You will have to pay it in addition to your regular payment.[25]
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    Understand prepayment penalties. If you pay your loan back more quickly than specified by the terms of the loan, then the lender doesn’t get as much income in interest payments. Some lenders cover themselves by charging prepayment penalties or exit fees if you pay off your loan before a certain date.[26]
    • To avoid prepayment penalties, look for the words “no prepayment penalty” on your loan application materials.[27]
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    Avoid accidental overdrafts on your checking account. Some borrowers set up automatic payments from their checking account to pay the monthly loan payments. But if your checking account gets low, you could potentially overdraft your account. This will cost you overdraft fees of about $35.[28]
    • To avoid this, consider opting out of automatic payments.
    • You could also set up a low balance alert on your checking account.

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Categories: Banking