At some point in your life, you may need to borrow money. Whether it’s an auto loan to help purchase your next vehicle or a small dollar loan to make an emergency auto repair, an installment loan may help you take on different expenses.
Once you realize you need a little help, your next big decision is choosing the right loan for your situation. In your research, you may come across unsecured installment loans – a loan you pay back along with any applicable fees and/or interest, over a fixed period of time without putting up collateral. Keep scrolling to find out more about this option. What you learn today may help you make the decision to borrow what you need in a way that works for your budget.
What is an Unsecured Installment Loan?
Look closely, and you’ll see that the term unsecured installment loan may actually be a mashup of two different loan types. To understand what they mean together, we need to define what they mean on their own.
Secured Vs Unsecured Loans
When it comes to borrowing money, you usually have a choice between secured and unsecured options.
Secured loans are backed by collateral. This means you pledge a valuable belonging — such as an asset or piece of property — as insurance for your lender. If you fail to pay your loan according to your agreement, your lender can take this collateral to recoup the value of your loan.
A mortgage is a perfect example of a secured loan, in which case the home itself acts as collateral. If your mortgage becomes delinquent, your lender may initiate foreclosure to sell your property. Nevertheless, collateral comes in all shapes and sizes. Depending on the loan, it may be a vehicle, jewelry, or a savings account. [1]
What Are Installment Loans?
An installment loan is a kind of loan where you receive the funds in one lump sum, if approved.
The installment loan earns its name from the way you pay it back. If you are approved for one, instead of paying it all back in one lump sum, as you would with a cash advance or a payday loan, you make a series of payments (or installments) over a fixed period of time.
Unlike a personal line of credit or credit card, paying off your installment loan signals the end of your loan. If you need more money in the future, you will have to apply for a new installment loan.
Your installments may coincide with your pay dates depending on the type of installment loan you receive. Three of the most common examples of installment loans (secured and unsecured) include:
- Auto loans
- Personal loans
- Mortgages
Each of the examples above has a specific role to play in your finances. If you need a new car, an auto loan may be the way to afford this big purchase. A mortgage is what you need if you plan on purchasing a home.
A short-term personal installment loan, on the other hand, is better suited for emergency expenses like unexpected medical bills and home repairs. This is an important distinction to note, as we’re focusing on what a personal unsecured installment loan is all about today.
What Are Some Pros of a Personal Unsecured Installment Loan?
An unsecured installment loan — or a loan without collateral that you pay back over installments — may come in handy when you’re facing an unexpected emergency.
Let’s look at some of the reasons why you might turn to a personal unsecured installment loan for help.
1. There’s No Collateral
An unsecured installment loan doesn’t need collateral — which means you don’t have to put something valuable on the line just to cover your unexpected expense. You may still apply for a loan even if you don’t own a home or a car to use as collateral.
This may be beneficial for anyone wary of backing their unsecured installment loan with their property. If something goes wrong, your potential lender can’t automatically take your home to recoup their losses. Knowing your home, car, or precious jewellery is safe may come as a relief at times.
2. Relatively Fast Application Process
Take collateral out of the equation, and there’s one less step involved in the application process. Since a personal unsecured installment loan lender doesn’t need to check your assets to see if you qualify for a loan, they can focus on other aspects of your application instead.
As a result, the application process for a personal unsecured installment loan tends to work on a comparatively faster timeline. After the lender verifies your information, if approved, you may receive your funds as soon as the next business day depending on the lender.
3. Transparency
Many unsecured installment loans come with fixed interest rates and payment dates. This means two things:
- The interest rate won’t fluctuate with the market during the term of the loan — it remains the same from start to finish.[2]
- The payments will be due according to a regular schedule.
You can usually find this information in the unsecured installment loan agreement. This financial contract may outline additional details of the loan including:
- The APR and any finance charges to be applied to the loan
- When you are expected to make the payments
- The amount of each installment
Knowing this information may help you budget for your personal unsecured installment loan.
What Should You Look Out for With an Unsecured Installment Loan?
Although a personal unsecured installment loan may have its benefits, here are some things to consider before applying for an unsecured installment loan.
1. Higher Interest Rates
Remember that collateral reduces some of the risks a lender may take during the lending process and so lenders may charge lower rates for secured loans. Remove collateral from the equation and their perceived risk may increase. As such, some personal unsecured installment loan lenders may charge higher fees/interest for loans that don’t require collateral.
The rates you ultimately receive depends on a variety of factors.
One of them may be your credit score, a three-digit number falling somewhere on a scale of 300 and 850. According to the FICO scoring model[3], credit scores can be divided into the following five credit ratings:
- Exceptional (800–850)
- Very Good (740–799)
- Good (670–739)
- Fair (580–669)
- Very Poor (300–579)
In 2019, the average FICO score in the U.S. reached a new peak of 703[4]. This means the average borrower has good credit and can generally access competitive rates.
But for those who fall short of the average credit score, the rates may be higher. In some cases, the closer you get to the bottom of the scale, the higher your interest rates may be if you borrow unsecured installment loans online or in-person.
An unsecured personal loan may be an expensive form of credit. If you get approved and plan on borrowing unsecured installment loans online, make sure you read your loan agreement thoroughly, so you understand the true cost of borrowing.
Knowing how your payment schedule works — from the frequency of payments to the amount due — will help you determine if it’s an affordable option. Check in with your budget (or make one using the zero based budget method, as an example) to see how these payments fit in with your other expenses.
We recommend reviewing both your fixed and variable expenses in search of savings. Any spending you can reduce or put on hold will free up more cash you can put towards your payments.
If possible, making additional payments towards personal unsecured installment loans may reduce what you pay in interest and other fees over your term.
Just make sure there is no penalty for making these additional payments or paying off your loan early. Using a payment calculator may help you determine if these penalties are worth what you may save in interest.[5]
2. Loan Amount
Before you consider applying for a unsecured installment loan, make sure that the lender is offering the amount that suits your needs. If you need help to recover from an emergency when disaster strikes, a short-term personal unsecured installment loan may be more suitable.
This could be when your savings may fall short of what you need when your car breaks down out of the blue, your cat needs to see the vet, or you have medical bills after unexpectedly falling sick.
Because a personal unsecured installment loan is meant for these small, short-term financial obligations, they tend to offer lower loan amounts than other installment loan options.
Your exact borrowing limit may vary depending on your financial profile, your choice of lender, and your needs.
3. Repayment Time
A loan may be considered short-term if you pay it off within a few months or years of receiving it. By comparison, a longer term installment loan, such as a mortgage, may take several years or even decades to pay off.
A shorter term allots less time to pay back an unsecured installment loan. This, combined with higher interest, means your individual installments may be proportionately higher.
Borrow if it Makes Sense for Your Finances
If you have bad credit when a financial emergency arrives, a personal unsecured installment loan may be the option that works for you. The application process may be fast, and they require no collateral as a backup.
An unsecured installment loan may be an expensive form of credit, so it should be used responsibly in times of need. While they are not meant to be a budget booster on your next vacation, they may help you take on unexpected emergency bills and repairs.
To learn more about finding unsecured installment loans online, contact MoneyKey today to see what we do.
[1] https://www.finder.com/ca/collateral-used-for-loans
[2] https://www.investopedia.com/terms/f/fixedinterestrate.asp
[3] https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/
[4] https://www.cnbc.com/select/average-fico-score-hits-record-high-703/
[5] https://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx
