Unsecured Personal Loans: A Brief Guide to Choosing the Right Option

With the problems in the economy that prevail today, there is little wonder that so many people are in need of extra funding. For many of us, the only realistic financing option is an unsecured personal loan. But, despite expectation that bad credit scores make approval difficult, there is every chance of a successful application.

A key part to getting approval with bad credit is to apply for the right kind of loan, and from the right kind of lender. And in this respect that are a number of options that need to be considered. From traditional lending institutions, like the well-known banks, to the relatively new array of online lending firms, the choice is extensive.

It is, therefore, important to consider the options available before actually applying for a personal loan. Here are a few points that should be considered to start with.

What Does Unsecured Mean?

In case there is any confusion, an unsecured personal loan is just one kind of loan that can be taken out, with the other being a secured loan. The only real difference between the two is the inclusion of security in the loan deal, known as collateral. This is a possession that the borrower offers as compensation to the lender is they default on the loan.

The advantage of including collateral is that it lessens the risk the lender is under of losing money, therefore increasing the chances of getting approval with bad credit. Another advantage is that a lower rate of interest is charged, thereby making the loan more affordable to repay.

The problem is in finding something that matches the value of the loan. For a small personal loan of perhaps just $1,000, it might be easy to find an item of jewelry that can be used as collateral, but the task is harder for a loan of $10,000.

Online or Traditional Lenders?

The second consideration before making your application is where to apply. Most of us think immediately of going to our local bank and seeking a loan there. However, traditional lenders are infamous for their poor terms on unsecured personal loans, especially when the borrower has a poor credit history.

Typically, a bank charges a high rate of interest on the loan. The idea is that the lower the credit score, the more likely the borrower is to default on the loan – though statistics do not necessarily hold that belief up to scrutiny. However, when seeking approval with bad credit, it is normal to accept these compromises.

In contrast, online lenders design their personal loan packages to suit borrowers with low credit scores, with more competitive interest rates and more flexible repayment schedules. It is their niche area that sees them flourish despite competition from established banks.

The Family Option

While online lenders are a genuine lower-cost loan source, the most affordable unsecured personal loans are found much closer to home. A family loan, for example, is provided by a member of the family and as such, approval with bad credit is virtually assured. And since it is between family, there is usually no interest charged (or very little).

However, as with every kind of financial deal, it is essential that terms and conditions be written down and signed before any money changes hands. This is for the sake of clarity as much as anything else. So, when getting a personal loan from your father, brother, sister or cousin, the terms can be much more suited to your needs.