How much interest will you pay?
Interest rates for unsecured loans can vary dramatically: One lender might offer unsecured loans with interest rates ranging from 7% to 36%. Unsecured loans can offer a lower interest rate than you'd get with a credit card, but only if you can get a loan with a low interest rate.
These factors that will determine your interest rate when applying for an unsecured loan:
- Your lender's range of interest rates.
- Your credit score. This is the most important factor in determining your interest rate.
- Your other debts, your income, and your employment history.
- The length of your unsecured loan term. All other things being equal, shorter loan terms generally get better interest rates.
- Your loan amount.
- Whether you agree to pay automatically. Many personal lenders offer a small interest rate reduction if you agree to auto-pay your loan payments.
Fees and other costs of unsecured personal loans
Many personal loan lenders pride themselves on charging no fees whatsoever, while others do have various costs associated with them. Here are some fees you may encounter while shopping for an unsecured personal loan:
Origination fees: This is a fee that is charged when you obtain a personal loan. Many lenders with origination fees deduct it from the loan's proceeds. In other words, if you borrow $10,000 with a $200 origination fee, you can expect $9,800 to show up in your bank account.
Prepayment penalties: Although these are quite rare, prepayment penalties do exist. These are fees that a lender charges you if you decide to pay your loan back early. The rationale is that by making a loan, the lender is expecting a certain amount of interest income. Since your lender won't get all of its interest income if you pre-pay, a prepayment fee is designed to somewhat offset that.
Late payment fee: Many personal lenders charge an additional fee when payments are late. Late payments can also lower your credit score. Getting stuck with a late fee and dinging your credit score is a double whammy, so only take on an unsecured loan if you are absolutely sure you can make the monthly loan payment.
Do you need great credit to get an unsecured loan?
No. There are several personal loan lenders that specialize in loans to consumers with average credit scores. For example, personal loan lender
Avant accepts borrowers with poor credit and higher. Other lenders such as Upstart and Lending Point also accept borrowers with so-so credit scores.
To be clear, you aren't likely to get a single-digit interest rate on your unsecured loan unless you have good credit. However, personal loans can still be great financial tools for borrowers with less-than-excellent credit scores.
Can an unsecured loan be good for your credit score?
Yes, an unsecured loan can boost your credit score. Usually, credit bureaus see personal loans as "better" than credit card debt. So shifting your debts from credit cards to personal loans can significantly boost your credit score. If you're using an unsecured loan to consolidate credit card debt, you might see your credit score improve.
As a personal example, I obtained a personal loan a few years ago to consolidate a few credit card balances. Although the dollar amount of my debt didn't change, my FICO® Score shot up by 30 points shortly after the loan was completed.
Unsecured personal loans vs. credit card balance transfers and 0% intro APR offers
An unsecured loan can be a smart way to consolidate credit card debt and pay for personal expenses. However, it's not your only option. For example, there are several credit cards on the market that offer promotional 0% intro APR periods of 18 months or more.
So, what is an unsecured loan? It's a loan that allows you to pay for projects that need to be completed, to consolidate debt, and -- if you're careful about how you use it -- to help you build your credit score.
