The most common reasons for personal loans in Canada are buying a car or consolidating debt. When you take out an unsecured personal loan, you can use it for almost any reason under the sun. What is an unsecured personal loan?
Unsecured personal loans are a type of loan that is not secured by any collateral. What does this really mean and is it beneficial to the borrower? Let’s explore unsecured personal loans so you can decide if this line of credit is right for you.
What Is an Unsecured Personal Loan?
We mentioned that personal loans can be used for anything from buying a car to consolidating debt. So, what exactly is an unsecured personal loan and how does it differ from other types of loans? An unsecured personal loan is a lump sum of money that you can borrow from a lender.
The loan is not secured by any collateral, which means that if you default on the loan, the lender can’t take your home or car (or any other asset). Individuals looking for these types of loans are often in need of quick cash for emergency expenses.
Because they are not backed by any collateral, they often come with higher interest rates than secured loans. However, unsecured personal loans can be a helpful tool for borrowers who do not have access to other types of credit or who need funds quickly and do not want to risk losing their assets in case of default.
Secured Vs Unsecured Personal Loans
When you’re considering a personal loan, one of the first decisions you’ll make is whether to choose a secured or unsecured loan. A secured loan needs you to put up some form of collateral such as your car or home as a guarantee to the lender that you’ll repay the debt.
If you don’t repay the loan as agreed, the lender can take your collateral to recoup its losses. An unsecured loan doesn’t require collateral and generally has higher interest rates than secured loans, but it may be more difficult to qualify for an unsecured loan if you have bad credit.
Collateral
With a secured loan, the lender has the right to seize your collateral if you default on your loan. This means they can sell your asset to cover the cost of the loan.
For example, let’s say you apply for a secured personal loan using your car as collateral and then default on the loan. The lender could repossess your car and sell it to cover the cost of the debt.
If the sale of your collateral doesn’t cover the full amount you owe, you’ll still be responsible for paying off the remainder of the debt.
Types of Unsecured Loans
There are several types of unsecured loans. Some of these are:
Credit cards
Credit cards are a form of revolving credit, which means you can borrow up to a certain limit and then repay the debt over time. Credit cards typically have high-interest rates, so they should only be used for emergencies or short-term financing.
Personal Lines of Credit
A personal line of credit is similar to a credit card in that it’s a form of revolving credit. However, lines of credit usually have lower interest rates than credit cards. Lines of credit can serve a variety of purposes, such as home improvements, tuition, or consolidated debt.
Personal Loans
Personal loans are installment loans, which means they have a fixed repayment schedule and you borrow a fixed amount of money that you repay over time.
Personal loan terms typically range from one to five years. These loans can consolidate debts, pay for a major purchase, or finance a home improvement project.
Loans For Improvement of Finances
If you’re looking to improve your financial situation, it can be a helpful tool. Personal loans can have many benefits, such as debt consolidation, reducing high-interest debt, or financing a home improvement project.
Personal loans can help you save money by consolidating multiple debts into one monthly payment. This can help you pay off debt faster and reduce the amount of interest you pay over the life of the loan.
If you have high-interest debt, such as credit card debt, personal loans can help you save money on interest payments. Personal loans typically have lower interest rates than credit cards, so debt consolidation can help you save money on interest.
If you’re considering a home improvement project, personal loans can be a good option to finance the project. Home equity loans and lines of credit usually have lower interest rates than personal loans, but they require collateral (your home).
If you don’t have equity in your home or you don’t want to put your home at risk, this loan can be a good option to finance your home improvement project.
Loans for Personal Health and Wellbeing
An unsecured personal loan is a helpful tool if you’re trying to improve your health or well-being. Personal loans can help to finance a variety of health-related expenses, such as:
- Medical bills
- Dental bills
- Vision care
- Weight loss programs
Student Loans
If you’re looking to finance your education, a personal loan is a helpful option. You can use personal loans for a variety of educational expenses, such as tuition, room and board, books and supplies, and transportation.
One of the benefits of using a personal loan for educational expenses is that you can shop around for the best rates. Private student loans usually have variable interest rates, so it’s important to compare rates from different lenders before you decide on a loan.
Another benefit of using a personal loan for educational expenses is that you can choose a repayment plan that fits your budget. Most student loans have a 10-year repayment plan, but you can often choose a shorter or longer repayment plan with a personal loan.
Disadvantages of an Unsecured Loan
There are some disadvantages to taking out an unsecured personal loan. One of the biggest disadvantages is that you may have to pay a higher interest rate than you would on a secured loan. This is because lenders see unsecured loans as being riskier.
Another disadvantage of unsecured loans is that they often have shorter repayment terms than secured loans. This means that you’ll have to make your payments more frequently, which can be a challenge if you’re on a tight budget.
Finally, unsecured loans may not be available in as large of an amount as secured loans. This is because lenders view unsecured loans as being riskier and they want to limit their exposure.
Unsecured Personal Loan Tips
If you’re considering an unsecured personal loan, there are a few things you can do to increase your chances of getting approved:
Check your credit score and report for errors. Lenders will pull your credit report when you apply for a loan, so it’s important to check your report in advance and dispute any errors.
Build up your savings. Having a healthy savings account can make you a more attractive borrower, as it shows you have the ability to save money.
Reduce your debt-to-income ratio. Lenders want to see that you have the ability to repay your loan, so having a low debt-to-income ratio is important. You can lower your ratio by paying down your existing debt or increasing your income.
Shop around for the best rates. Different lenders offer different rates, so it’s important to shop around and compare offers before you decide on a loan.
Unsecured Personal Loan Application
Applying for an unsecured personal loan is similar to applying for any other type of loan. You’ll need to fill out a loan application, which the lender will use to assess your creditworthiness. The lender will also look at your income and employment history to determine whether you can afford the loan.
If you’re approved for the loan, you’ll need to sign a loan agreement that outlines the terms of the loan, such as the interest rate, repayment schedule, and collateral. Once you sign the agreement, the lender will disburse the funds to you.
Once upon a time, you had to go to the bank or credit union to apply for an unsecured loan. Now, there are reputable lenders who will give you a loan with a simple online application. The application process is quick and easy, and you can usually get a decision within minutes.
Get an Unsecured Loan Online
Now you know the answer to “What Is an Unsecured Personal Loan?” and know how to secure one for yourself. Start your application with us today. We offer a variety of loans with competitive interest rates and flexible repayment terms.
You can apply for a loan online, by phone, or in person at one of our many locations across Canada. So if you’re looking for a personal loan to finance your education or cover another expense, apply today. We can get you a loan in as little as fifteen minutes.
