Personal loans are broadly categorized into two, secured and unsecured loans. There are different types of loans under these two broad categories. Secured loans require borrowers to pledge an asset that can be used to recover the outstanding loan amounts in case they default. In most cases, the asset used as security serves as motivation for the borrower to repay the loan within the agreed period.
Since these loans are secured, most of them are always cheaper in terms of interest rates, other associated fees and the repayment period. On the other hand, unsecured loans do not require an asset for security. The loans under this category are offered on merit. Since the lenders carry a lot of risks lending money, unsecured loans may be relatively expensive compared to secured loans.
There are so many types of unsecured loans with different sources, including online. You are supposed to be logical when making borrowing decisions, especially when dealing with unsecured loans. If you are not careful, you may end up in a financial crisis. It would be best if you considered several things before sending your application. This discussion will mainly focus on unsecured loans. Specifically, we are going to discuss the options to consider before you decide to apply. Let us see.
When to use unsecured loans
Unsecured loans are better applied when the funds are needed for a specific reason. For instance, in case you are plagued with a high-interest loan, and you really want to consolidate, it would be wise to an unsecured debt consolidation loan. Again, there should be financial prudence in this decision. It would be unwise to apply for a debt consolidation loan when you cannot save on interest rates.
You don’t have to use unsecured loans to cover expenses simply because the funds are there. You are applying for a loan to finance the things that you want, for instance, going for a vacation or acquiring a luxury, rather than what you need is unwise—unnecessary borrowing detriments your financial standing. The best way to finance luxuries is to wait until you save sufficient funds to cover the associated costs.
Interest rate is an essential variable when it comes to borrowing. There are so many money lenders open on Sunday  out there, each with different offers. Rational borrowers will want low-interest loans in case there are no other factors that can make the loan very expensive and inaccessible. When you want an unsecured loan, it is vital to look at the offers from different loan providers.
As we earlier stated, unsecured loans may be relatively expensive since security is not needed. In most cases, the ranger for interest rates varies between 5% and 36%. The rate charged will depend on several factors, including your creditworthiness and the type of lender you are dealing with. That is why it is advisable to compare different offers.
There are cases when lenders ask for an origination fee. This is mainly used to cover the expenses incurred while processing the loan. The fee often ranges between 1% and 6% of the total amount borrowed. These fees may also vary depending on the loan provider. Additionally, some lenders will also require borrowers to pay some amount in case they are paying the loan earlier than expected. This is what is commonly referred to as prepayment penalty.
However, you can benefit immensely by paying the loan earlier, specifically from interest payment. It will help if you shun loans that carry prepayment penalties. Most lenders also charge late payment fees. This is understandable due to the inconveniences that come with late payments. All the time, make sure you are submitting payments at the right time. In case you anticipate that you may not be in apposition to beat the deadline, talk to the loan provider in advance.
Why do you have to consider others fees apart from interest rates before considering applying for an unsecured loan? For a simple reason – these fees may make the loan expensive and unaffordable. For instance, an unforeseen circumstance may render you unable to make a payment in time. In case the late payment fee is very high, you may get into financial distress.
Your repayment plan
It would help if you established a suitable repayment plan before sending an application. How do you intend to pay off the loan? In case you find it challenging to respond to this question, then borrowing is a wrong decision at this time. The last thing that should happen is to borrow when you cannot afford to repay. Sometimes you may even have all it takes to repay a loan, but without a concrete repayment plan, you may struggle a lot. Re-examine your motive for borrowing and how you intend to pay the loan in terms of time and sources of funds before applying.
Without an appropriate repayment plan, you can hardly be approved. The worst you can do is to send other applications to different lenders immediately you are declined by one lender. This may lead to a significant drop in your credit score.
Other alternatives to unsecured loans
Is it possible that you can get other sweeter deals? It is vital to look at other options at your disposal before sending an application. For instance, is it possible that a friend or a family member can offer you a loan with low or without interest? Is it possible to obtain funds elsewhere, for instance, by selling the stuff that you currently do not need? Can you save on interest and other costs if you apply for a secured loan?
The Bottom Line
There are several factors that you need to consider before applying for an unsecured personal loan. We have discussed some here, including interest rates, related fees, repayment plan, the appropriate time to use, and other better alternatives. It is also imperative to look at the loan period. You need sufficient loan to repay the loan comfortably. In case the lender cannot offer a favourable repayment period, do not apply for the loan.