Unsecured Loans as a Safe Borrowing Solution

by admin on November 29, 2013

Unsecured personal loans are riskier for financial institutions because they are not secured by collateral. Unlike secured debt, the loan is not backed by a valuable asset or property. Banks offer higher interest rates to offset the risk of default.

Features and Benefits

This product is offered by different financial institutions, including credit unions, banks, finance companies, and others. Borrowers make monthly payments towards the principal and interest charges. There are other fees and charges as well, including early exit penalties or prepayment charges, monthly fees, setup fees, and others. The setup fees vary from bank to bank. Some financial institutions offer perks such as no setup fees and attractive interest rates. The problem is that these bad credit loans often come with higher interest rates. Thus the upfront fee is included in the interest charges. The monthly maintenance fees also increase the cost of borrowing. When it comes to the minimum amount, some lenders have criteria while others do not. The maximum term also varies and refers to the maximum term or period by which the outstanding balance must be paid off in full. There are short- and long-term types of financing. The typical term is between 7 and 10 years.

Criteria and Requirements

The main benefit for borrowers is that personal loans are less risky. With secured debt, a valuable asset such as equipment, vehicle, or machinery is offered to back the loan. Thus it is more difficult to get approved. Banks require that applicants have a stable income and excellent or very good credit and payment history. This shows that they are trustworthy borrowers.

Applicants are asked to present their personal and financial information such as their bank statements, tax information, proof of income, employment and contact details, and more. Banks also require that borrowers enclose recent pay stubs with their application. The income level of applicants allows financial institutions to determine their financial situation and debt to income ratio. The borrower’s total debt load is taken into account, including mortgage payments, credit cards, lines of credit, personal and auto loans, and others. This is done to verify the applicant’s ability to meet his monthly payments. Obviously, borrowers need their personal information as well, including their social insurance number, ID card, driver’s license, and so on. These details are used to run a credit check and look into the borrower’s credit and payment history.

Financial institutions are interested in your debt load, types of debt, missed and late payments, delinquencies, and more. Most banks require a credit score of at least 660, but some accept lower scores. You need to bring your bank statements as well. Most financial institutions want to check the applicant’s bank activity to verify that he is making regular payments. Banks look at details such as late payments, prepayments, and overdraft activity. Finally, financial establishments also require that applicants enclose their tax returns to check whether they are regular tax payers.

Applying for a Loan

The first place to check is your local bank or credit union, especially if you are an existing customer. If you have an established relationship with your bank, they may offer you a lower interest rate. Your local bank is not the best choice if you have a poor credit score. Banks can be pretty rigid and have strict criteria and guidelines. They may be unable to approve your application even if your score is several points lower. It is worth looking for alternative sources of financing in this case.

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