Unsecured Personal Loan — Make Sure to Read the Fine Print
Written by: Kristy Welsh
Last Updated: October 11, 2017
Are you thinking about making a large purchase in the near future but don't have the cash on hand to pay for it all up front? Then, think about taking out an unsecured loan from one of your local banks or credit unions. Unsecured personal loans allow you to borrow money for almost any purpose.
An unsecured loan is a loan that is not backed by collateral. These loans are also referred to as personal loans or signature loans. An unsecured loans is based solely on the borrower's credit rating, so as a result, they are much more difficult to obtain than a secured loan. But, before you get an unsecured loan, make sure you understand how they work and what the alternatives are.
Types of Unsecured Loans
There are several types of unsecured personal loans available, each one has it's pros and cons. It is best to pick the one the best meets your needs while minimizing cost to you.
- Signature Loans — This is most basis type of unsecured loan and they are secured by nothing other than your signature. You can use this type of loan for just about anything and they are available at banks and credit unions. If you have good credit, you will get a relatively low interest rate. If you have bad credit, this type of loan will help you rebuild your credit.
- Credit Cards — Credit cards are another way to borrow money. Credit cards may be easy to get but make sure to look at the interest rate before you sign up - you could pay as much at 24% if you have bad credit. Looks for low interest cards and ones with no annual fees.
- Student Loans — Another unsecured loan is a student loan which is designed to fund your education. Look for features such as flexible repayment options, grace periods, and subsidies. The only hitch with this type of loan is that you have to be a student.
What to Look For When Shopping for an Unsecured Loan
If you are currently shopping for an unsecured personal loan, you should know that other than the interest rates, you should also be looking into the documents you will have to sign when you finally get your loan. Most contracts for unsecured loans contain provisions in small print that many borrowers take for granted and do not bother to read at all. Learn what you should be looking for in the small print provisions and do review the loan documents while you're still shopping and not when you're ready to sign them before the loan release. This way, you can be assured that you're getting the best possible terms for your loan. Lenders usually include in the small print their provisions covering loan insurance, penalties on prepayments, and adjustments on APR (annual percentage rate).
Penalties on Prepayment
The means the lender will charge you a fee if you pay off your loan before the agreed term. While this is not especially common for unsecured loans, it is a requirement on secured mortgage loans. The fee is basically a penalty for your prepayment and is meant to compensate the lender for the additional interest income it would have earned had you kept the loan outstanding until the agreed term.
Some lenders may not be clear about their policy on prepayment but try to look for it in the small print section of the loan contract. You can always look for a loan provider that does not charge prepayment penalties or at least go with the lender that charges the least in penalties.
Another common policy in small print is the adjustment on APR. This type of loan was dubbed a "sub prime" loan in the mortgage industry and is one of reasons the housing market blew up.
Many lenders advertise a certain APR but this is usually given only to highly favored customers. So if your credit is less than perfect, expect a higher APR for your loan and any adjustments on your interest rate are customarily written in small print. By law, lenders are required to inform borrowers about their APR before signing any loan documents and by practice, lenders do so by putting them down in the small print section of the contract. Your signature on the same document signifies your knowledge of the APR you will have to pay. Therefore, you must read the small print to know how much they are charging you.
Loan insurance is not common on unsecured personal loans, but it does occur. In rare occasion lenders require loan insurance to cover your payments in case you cannot pay your loan because of injury or loss of employment. The insurance premiums are usually added to the loan payments you have to make.
There is no doubt that loan insurance will help protect your credit in case of adverse developments but you need to be concerned about its added costs to you. Know that lenders and the insurance company they endorse are normally affiliated and the insurance they're tacking in your loan is usually not the best offer you can get. Know also that you are not required to buy your insurance through the lender. You can shop around so you can get the best loan insurance deal you can find. However, you should shop for your insurance before getting your loan so you won't be forced to accept the lender's insurance when the time comes.
The only way you can avoid the usual small print tricks lenders use on unsecured personal loans is by asking lenders for a copy of their loan contract when you're still shopping. It should not be a problem for lenders to provide you with a copy of their standard contract. Do remember that the APR a lender will charge you is not going to be in the contract yet. You will get that information before you sign the document but at least, you'd know where to look for it.