Unsecured Loans

Unsecured loans are issued based on the creditworthiness of the borrower. These loans can include term loans, credit cards, charge cards, personal loans, revolving lines of credit, retail credit cards, and student loans. Debt consolidation loans and signature loans may also be considered unsecured loans. However, the majority of unsecured loans are revolving loans, meaning they can be spent, repaid, and spent again. 

The Annual Percentage Rate (APR) of an unsecured loan can help you evaluate the best offers and promotions from various traditional and alternative lenders. In some instances, you may only need to pay what you’ve spent if you’re making payments in full within a certain amount of time. It’s important that you consider all available credit options before opening a new unsecured account given that many have ballooning or high interest rates that trigger based on spending history, the balance you carry, or other potentially risky factors.

Terms loans, which are also known as unsecured loans, personal loans, and signature loans, are the most common type of non-revolving unsecured credit. These loans are for a specific amount with a fixed term and interest rate, and the loan funds do not replenish as you make the required monthly installment payments. The loan funds can be used for nearly any purpose, whether that be home improvements, a much needed renovation, a holiday or vacation, or a major expenditure or purchase. Issuance of an unsecured term loan is nearly entirely based on your creditworthiness, considering factors such as your FICO score, your income, your employment history, your debt to income ratio, and possibly your rental or mortgage payment and other financial obligations. However, if you have facing a legitimate emergency, it is possible banks will ease their requirements to ensure you’re able to address the situation. Terms loans are issued by national banks, regional banks, local banks, credit unions, online lenders, alternative lenders, and Peer to Peer (P2P) lenders. The loan term will heavily depend on the amount borrowed, your credit score, your debt to income ratio, and your relationship with the lender. It is very important to shop around given that all lenders will be targeting higher credit score holders and you can easily be duped into paying a high interest rate or enter a loan agreement with a ballooning rate over time. If you have good credit, it is recommended that you only work with banks and credit unions. Though online lenders are much for convenient for preapproval, approval, funding, and payment purposes, these lenders generally carry a much higher interest rate. Borrowers with credit scores over 650 and an average to low debt to income ratio will generally find it easier to obtain an unsecured loan than those with less-than-perfect credit. However, if you have an average, below average, or low FICO score, there are lenders that specifically cater to these types of accounts. Again, the key to obtaining a loan is shopping around and understanding what best works for you. Term loan interest rates can range from 2.29% to nearly 30%. Given this spread, it is best to approach multiple borrowers with a pre-qualification tool that doesn’t affect your credit score to determine which loans you could be approved for.

Credit cards are the most common type of revolving unsecured credit. A credit card is a line of credit issued by a financial institution that provides borrowers with purchase power in the form of a physical card. The credit card can be swiped at shop payment terminals or used online. They can also be linked to "wallets" such as Apple Pay for quick and seamless online payments. Credit cards are certainly a day-to-day part of our lives and it is likely that you already have one (or, three). Though some credit cards are secured by a deposit, the majority of credit cards do not require such collateral. Obtaining a credit card is relatively easy as long as you have below average to excellent credit and a reasonable debt to income ratio. APRs on credit cards are much higher than term loans given that financial institutions make significant money on revolving debt and notably cardholders who carry a month to month balance. APRs can range 0.00% to nearly 30%, depending on the type of card, the financial institution, the card limit, and the cardholder’s payment history. Many credit cards have "triggered" APRs, which means higher interest rates kick in when a certain monthly balance is reached or there is a missed or late payment on the account. It is very important to always read the fine print of your credit card agreement to ensure you’re not going to end up with high rates or additional fees in such instances. Given the competitiveness of the credit card market, there is something for nearly everyone.

Charge cards are essentially credit cards that need to be paid off at the end of every billing cycle, which is normally monthly. So, if you spend $3000 on a charge card such as the American Express (Amex) Centurion, Amex Platinum, or Amex Gold charge cards, you are expected to pay the bill in full at the end of the period (or, within 21-30 days of the end of the billing cycle). Charge cards usually come with benefits such a points or cash rewards, niche concierge services, travel perks such as companion tickets or flight upgrades, or dining experiences. Charge cards normally have an annual membership fee that ranges $100 to $2500 depending on the card. It is important to remember that it takes discipline to maintain a charge card account. For the most part, these are one chance services in that if you miss more than one payment, your account will be severely restricted or terminated altogether with no chance to rejoin in the future.

Revolving lines of credit work like credit cards but you either (1) transfer credit funds from the line account into your normal checking account for use with your debit card (2) directly withdraw from your line of credit account from an ATM or (3) transfer to third parties from the credit line. Credit lines have a maximum amount of cash that can be spent and the line replenishes as you make payments against it. APRs for lines of credit are normally lower than credit cards given that they’re usually issued by banks and only after you’ve proven financial maturity with the institution. Lines of credit are often used for expenses such as a holiday or vacation, or when you need to purchase larger items such as appliances.

Retail cards are high interest credit cards that are issued by individual brands or stores. These cards can only be used with the specific brand or shop to a maximum amount set by the backing financial institution (it is very rare for a retail card to underwrite its own credit cards). Retail cards can be useful for professionals such as stylists who work with specific brands but pay off their card with every purchase or at the end of every month. This practice ensures that low or no interest is being paid, and the benefit is usually rewards or other special deals for the consumer. On a personal level, it is very easy to get into trouble with a retail credit card given the high interest rates. If you’re addicted to shopping or an impulse buyer, you need to be very wary about opening a retail card account.

Student loans are also considered unsecured debt. This is because there is no physical collateral to repossess in the event of default. Getting an education is important and nearly everyone who goes to college has to incur some amount of student debt. However, appropriately managing your student loans is key to ensuring you’re not in debt for ten years after you complete your university degree. There are many student debt relief and forgiveness programs available with the Federal government and other non-profits throughout the United States. Even if you don’t think you qualify, you should still apply to see if there is some exception with your case. You may have your entire student loan forgiven if you’re in the military or work in a specific covered sector such as non-profit jobs.

Tip 1: You might think it’s smart or cool to have five credit cards, but it’s not. You’re probably a credit seeker. You should only have one or two credits cards open at anytime, and (maybe) one extra card "on ice" in case you need it for a future emergency. It is a much better plan to build up your credit limits over time with two or potentially three card issuers than it is to try to manage five card balances simultaneously. You should also be aiming towards obtaining cards with cash back or travel rewards so you’re being rewarded for all of your spending and, in some case, payments. You should only open a charge card account if you have the financial discipline and income to do so. It is very easy to get yourself in trouble with a charge card for missed payments or non-payment. Especially with charge cards that offer "no preset spending limit." If you can’t afford to the pay the balance in full every month, you can’t afford to have a charge card. Retail cards are a no-go unless you need it professionally or you’re a very disciplined shopper who primarily frequents one store. These cards carry very high APRs and some even have "triggers" for non-payment or missed payments. With any card, be sure to read the agreement’s fine print to fully understand what you’re getting yourself into.