Unsecured Loans to Improve Credit

Whether you’re unhappy with your current credit rating, or you simply wish to improve your score before you need it, there are a variety of methods at your disposal to beef up your credit. Using unsecured loans is a way to prove your credit worthiness and build a solid lending relationship. Of course, this strategy can backfire on you if your use of personal loans doesn’t follow disciplined guidelines.

Basics of Unsecured Loans

Unsecured loans can come in a variety of forms, but they all share the commonality of not requiring you to put up collateral. To a degree, this is a riskier transaction for your lender because they get nothing in return if you decide to default on your financial obligation to them. For this reason, interest rates on unsecured personal loans are higher than you’d receive for an auto loan. Loan amounts may also be smaller and come with shortened repayment periods.

How to Use Unsecured Loans

Because of the risk to lenders associated with unsecured loans, proving you can repay even a small $5,000 personal loan will begin establishing your good payment history. If you always make your payments on time, this small loan can boost your credit score and win you lower rates when you apply for another loan. As long as you have sufficient income and room in your budget, you can repeat this process of obtaining and paying off personal loans as many times as you like.

How Not to Use Unsecured Loans

Worse than having no credit is using unsecured loans to prove lenders cannot trust you with extensions of credit. Before you apply for any personal loans or lines of credit, always take the time to consider your financial position, and whether you can afford the payments over the life of the loan. If you have any doubts about your ability to repay the debt, do not apply.

Another pitfall some borrowers fall trap to is applying for too many unsecured loans at once. When it comes to your credit score, more does not always mean better. In fact, credit bureaus can take your sudden interest in personal loans to mean you’re about to go on a spending spree and overextend yourself. Along the same lines, avoid applying for addition unsecured personal loans when you already have one or two outstanding. Again, having too much available credit makes credit agencies and lenders wonder about your true intentions.

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Understanding Personal Loan Lenders

The first step to getting the loan you need is finding a lender. Personal loan lenders work in a variety of locations, offering a multitude of lending products. Even though some lenders specialize in a particular type of loan, they can still offer options outside their area of specialty and expertise to fit your needs. Learn about your lender options before making a decision and evaluate which is best for you.

Financial Institutions

Banks and credit unions are the most well known personal loan lenders in the industry. They operate on both sides of the balance sheet, taking in deposits from customers and lending money to borrowers. Although all lenders must meet government regulations concerning lending practices, large national institutions typically have more policies and procedures in place to govern employee behavior. The person you give your application to is rarely the one who makes the decision about extending credit to you. On the other hand, smaller financial institutions may allow you to walk in, make your case to the loan officer and walk out with a check in hand.

Financial institutions typically specialize in unsecured personal loans, lines of credit, credit cards and auto loans. Depending on your state's laws, your bank may also offer a wide array of home equity lending options.

Payday Loan Companies

Payday loan companies have a more restricted product set than the traditional financial institution. This company's bread and butter is the payday advance loan used to provide borrowers extra cash in between paydays. Some offer car title loans and revolving credit lines, but this varies by business and does not usually offer favorable rates for borrowers with exceptional credit. Conversely, the underwriting guidelines may be somewhat less stringent than those of your bank, making payday loan lenders ideal for individuals with spotty credit histories.

Online Lenders

The only difference between most online personal loan lenders and conventional banks is that you can handle everything from the comfort of your home. While you lose the ability to speak with your loan officer in person, you may gain lower interest rates. Online lenders can do this by keeping their overhead lower than your typical brick and mortar establishment. The only word caution when getting a loan online is to thoroughly research the company before providing any personal information. If you can't determine their legitimacy, use a different lender.

This is not an exhaustive list of personal loan lenders, just a starting place for your research. For more complex lending needs, you may benefit from visiting with your mortgage representative or investment advisor, as these types of businesses offer limited loan options.

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Understanding Personal Credit Loans

The appropriate use of credit is an important skill for consumers to master in their financial lives. Using personal credit loans is about more than getting the cash you need, it’s also about repaying the money in a responsible manner. To understand personal loans fully, you must know the affect each has on you in addition to the loan’s terms and conditions.

Personal Loans and Credit

The relationship between personal loans and your credit score does not end after you receive the loan. Lenders have the right to report their experiences with you to the credit bureaus and they take regular advantage of this. If you follow the terms of your lending agreements and repay your personal credit loans accordingly, you won’t have any problems. On the other hand, mishandling your finances and defaulting on your credit obligations carries consequences.

To maintain good credit, avoid three common traps.

Relying on the Grace Period

Some personal credit loans provide leeway for payments in the form of grace periods. This helps you to avoid the late fee if your check takes an extra day in the mail or is in transit during a postal holiday. Loan grace periods are good things, unless you take advantage of them.

For example, if your mortgage payment is due on the 1st and late on the 16th, you have 15 extra days to get the payment to the lender. This helps you protect your good credit rating in the event your check is slow to clear at the bank. This grace period hurts you when you view the 16th of each month as your due date because you no longer have any leeway. If anything happens to delay your payment at the middle of the month, you risk a negative credit report and a late fee.

Missing Payments

It happens to everyone at some point. You receive the bill and you have enough money to pay it, but you still have plenty of time before the due date, so you set it aside. Weeks pass and you get a notice of non-payment because you forgot to go back and pay the bill. Make a habit of paying your bills when they first arrive or scheduling automatic payments. One missed payment on your credit report isn’t the end of the world, but multiple slow pays will lower your score.

Minimum Payments

If you have personal credit loans that offer minimum payment options, they are just that: the minimum you should pay. Not only will you pay more over the life of the loan by making minimum payments, your credit suffers as a result. Resolve to pay more than the minimum amount due on every account each month.

As long as you avoid the common traps, you can use personal credit loans as tools to improve your credit rating while financing the things you need.

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Understanding Financial Loans

Whether you’re a savvy borrower or this is your first time thinking about taking out a loan, it’s important to understand how financial loans work to make sure you get the best deal. The majority of banks and lending companies operate fairly and in the customer’s best interest, but knowing what they’re up to provides an extra measure of comfort. Rather than learning the ins and outs of the financial industry, brush up on a few key facts.

Why banks lend money

Helping people meet their monetary goals is a secondary benefit to your lender for making financial loans. Although the interest you pay on loans is an expense to you, lending money is a major portion of the income for banks and other financial institutions. Some loans, like mortgages, are more profitable to the lender because of the size and term, but every loan they make constitutes income as long as you fully repay the loan.

Factors to lending decisions

Depending on the institution, you may know the underwriting guidelines or how they decide to extend credit may be a mystery. Every company follows a different set of internal rules when making financial loans, but the basics generally remain the same across the industry. Your credit score is a major player in the decision because past behavior can be an accurate predictor of future actions. If you have a history of paying your bills on time, they have little cause for concern about your ability to make payments.

High credit scores alone do not guarantee approval. Lenders like to see debt service ratios (DSR) adequate to take on the extra payment load. Simply put, your DSR is an expression of how well your income covers your debt payments. You may also hear this called the debt to income ratio. As a rule, ensure your income is at least twice your credit expense to keep this ratio under control.

Important details for you

Obviously, you want the lowest interest rate possible, but there is more to consider when comparing financial loans. What are the fees? Mortgages usually carry application, title, appraisal and origination fees, while some lines of credit charge an annual fee regardless of use. The lowest interest rate is not always the best deal if the fees are high.

Make sure to ask about repayment terms. Some auto dealerships prefer receiving payments weekly or semi-monthly instead of once per month. This often means making a special trip to make payments instead of mailing checks. It’s also wise to find out if a pre-payment penalty exists. While you are free to take the full loan term, you’ll save on total interest costs by paying off the loan early. Penalties for doing so, however, eat into your savings.

Keep in mind that different types of financial loans carry different underwriting guidelines and terms. Always ask your lender to explain anything unfamiliar to you before signing the paperwork and you’ll be in good shape.

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Tips to Compare Personal Loans

Whenever you're in the market for a loan, you should always compare personal loans before making a final decision. Depending on the complexity of your personal loan request, there could be dozens of factors to consider. Or it could come down to who offers the best interest rate. Start with some personal loan basics and expand your comparison criteria from there.

Don't compare apples to elephants

Before you compare personal loans, make sure you're looking at comparable options. A loan and line of credit function in very different ways. If you must decide between two such dissimilar options, find a way to level the playing field, then make comparisons.

For example, a personal loan typically offers a fixed monthly payment, while a personal line of credit's payment will fluctuate based on the current interest rate and total amount advanced. For loan comparison purposes, assume you've advanced the full amount of the line of credit at the highest interested rate allowed in the contract. As long as that payment—the highest it can be—is comfortable, you can consider the line of credit to be a viable option. Just don't forget to compare application fees, annual fees and other contract features.

Don't stop comparing at the interest rate

Always read all the terms and conditions when you compare personal loans. The interest rate defines your total cost to borrow the funds, not whether it's the best deal available. Other personal loan features can make it well worth accepting a higher interest rate. These features include:

• The lender reports to the credit bureaus. If one lender doesn't report good payment history then you aren't helping improve your credit score with this personal loan.
• The lender packages products. Borrowing money where you bank is a smart idea if you can take advantage of packaged accounts. For instance, letting your loan balance count towards your total relationship balance with a financial institution can qualify you for a myriad of money-saving options. In particular, find out if your bank offers higher savings account rates, reduced fee stock trades or free checks as a result.
• The lender has convenient payment options. There is a definite benefit to not having to race to the bank monthly to pay your bill. Whether the company offers automatic payment is a good factor to consider when you compare personal loans, but expand your thinking on this one. If you don't like anyone drafting money out of your account, consider the convenience of the bank you pass on the way home each day or that operates a branch in your office building.

It's a sound financial practice to always compare personal loans before you sign on the dotted line to make sure you get the best possible loan for your needs. Make sure to always take into account the usual suspects of payment and rate, then compare any perks available.

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Tips for Online Loans

When you need money, scheduling an appointment with your local banker is not always a convenient option. Online loans provide convenience brick and mortar banks lack, but come with a new set of concerns. The anonymity of the internet coupled with the sheer volume of online lenders makes cyberspace a breeding ground for financial scams.

Finding an Online Lender

Locating a credible company to process your loan is the first order of business. The kind of loan you desire may focus your search for online loans into a particular area. If not, you can follow a few basic strategies to find a lender and verify their credibility.

• Visit popular banking sites. Most of the national banks and credit unions have online lending departments ready to meet your needs. Look for a link to the company’s online loan application on the site. Major banks may not offer rates as low as smaller competitor sites, but you gain the peace of mind in knowing this company’s reputation and financial stability.
• Search for a physical address. Although they do business online, there must be a physical office where underwriters and loan processors work. Even if you’re working with a broker that outsources most of the operation, he has to physically be somewhere. If you cannot locate an address for a company, move to another lender.
• Check for complaints. This does not have to be a drawn out process. A quick search of the Better Business Bureau or your state’s Attorney General will reveal if the company uses questionable lending practices. If nothing else, enter the company’s name into your favorite search engine to see if disgruntled posts appear.

Working with Online Lenders

With in-person loans, getting information to your lender is a straightforward process because you can drop off anything she requests. With online loans, you must rely upon technology.

• Fax machines. If your lender requires paystubs or tax returns, ask about the safety of the fax machine. Is it in a secure location or unattended in the middle of a large office? Although the majority of company employees wouldn’t do anything with your personal information, only send to fax machines where you know your lender will immediately get your documentation.
• Email documentation. When you have access to a scanner to upload your signed documents to your computer for emailing, always use this option. It’s easier to confirm receipt and there is less risk of interception.
• Mailing documents. Putting your loan documents into the mail is the worst option of the three, but some lenders will insist upon receiving original signed loan documents. Never send your documents through regular mail. Instead, use certified mail or a courier company so you can track delivery.

As long as you take the time to verify the legitimacy of your lender, online loans are a fast and convenient way to get the money you need.

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Small Loans for Debt Consolidation

If your credit card balances reach astounding heights, wanting a single payment at a lower overall interest rate is a natural desire. Although your bank may not be willing to offer you enough to pay off everything, consider how you can best leverage the small loans you can get. It’s a slower process, but paying off cards snowballs as you knock out your balances, making a bigger dent in the total number.

For example, if your total credit card debt is $25,000 with an average interest rate of 18 percent, taking a bank loan at 10 percent will almost cut your interest payments in half. In this situation, the lender offers a loan of $5,000, well under the amount you need. You have the option of turning this down; however, consider what you can accomplish with this relatively small loan.

You have three main options for the money.

Highest Interest Rate Approach

When your average interest rate is 18 percent, this means you pay rates much higher than that. List out your credit card interest rates and order them from highest to lowest. Starting at the top of the list, pay off as many cards as you can with the $5,000 loan. Yes, you’ll still owe $20,000 in credit card debt in addition to the $5,000 bank loan, but your average interest rate for the money should drop from 18 percent as a result. This means you’re paying more each month towards your principle balances than you were before you started using small loans. Paying less interest is a good thing.

Smallest Balance Approach

Depending on your financial situation, you may find that your $25,000 debt is scattered among 10 credit cards, making unreasonable demands on your monthly bill paying time. List your credit card balances from smallest to largest and see how many cards you pay in full before the $5,000 runs out. You may not save on interest as a result of this method and your overall credit payment amount may not go down, but you will save time by no longer writing as many checks or making as many online payments each month.

Largest Payment Approach

If cutting your monthly payments is your goal, using small loans can help. Determine which credit card has the highest monthly payment and apply the $5,000 loan to it. It doesn’t matter what the interest rate is or if you can pay off the full amount. Just pay it. As long as the payments fluctuate with your balance, the monthly payment will feature a decrease at your next statement.

Before using small loans for debt consolidation, perform your own calculations to make sure you’re using the consolidation approach that works best for you. If a consolidation loan won’t help your financial situation with the lower loan amount, pass.

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Signs of Bad Personal Loans

For the most part, lending companies are honest business ventures seeking to make a profit from providing loans to customers in need of the product. Although some lenders charge higher fees than you wish to pay, they are still legitimate entities. Unfortunately, not every lender behaves in an ethical manner and borrowers may not recognize the signs of bad personal loans until after they close the deal.

Spam Marketing Techniques

Unless you have an amazing spam filter on your email accounts, you’ll receive credit offers in your inbox at some point. When you’re in need of extra money and you find a guaranteed approval offer when you log in, it seems almost meant to be. That’s what the lender wants you to think. Out of the thousands of people they sent that message to, they hope a decent percentage will accept their terms.

Some of these spammers are out for your personal information so they can steal your identity. Other spammers want you to apply for their loan that charges loan shark rates. Either way, it’s smart to avoid working with companies who are too eager to seek you out. Quality lenders gain business through proven marketing efforts; bad personal loans use shady methods.

Pushy Sales Approach

Lenders like to impart a sense of urgency on their potential customers to make the sale. If they let you walk out of the office, they risk you finding a different lender and losing the loan sale. When your lender presses you to submit the application right then, it’s not a warning sign of bad personal loans; it’s a standard technique to make the sale.

On the other hand, you know the difference between someone trying to make a sale and someone trying to intimidate you to get what they want, in this case, the loan application. No matter how rough your credit history may be, your lender should never talk down to you because of it. Making threats about how you won’t get a loan anywhere if you don’t accept this one is also unacceptable behavior. If you’re in this situation, walk away. Using these tactics to win your business can only mean things will quickly deteriorate after you close the loan.

Avoiding Bad Personal Loans

While there is no magic formula to avoid bad personal loans, you can contact the Better Business Bureau to find out if other customers report shady behavior from a lender. Doing a bit of simple research on the lender’s website is also a good idea. If you can’t find an address and phone number for online lenders, but you do find a site riddled with typos, broken links and missing web pages, continue your search for a reputable lender.

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Secured Personal Loan Considerations

Among the most common types of loans is the secured personal loan. This loan can range from the simple to understand auto deal to a complicated borrowing arrangement with your life insurance company. Although every loan and lender works a little different from the rest, there are basic elements and considerations among secured loans.

Collateral Considerations

What sets a secured personal loan apart from unsecured lending options is the collateral requirement. Collateral is merely something you offer to the lender in exchange for the loan, providing an extra level of assurance that you intend to repay your full loan amount as specified in the lending agreement. This is an attractive option to borrowers who need more money than they could otherwise qualify for without collateral.

Using something as collateral is not a decision you should reach without careful thought. In the case of a car you own free and clear, offering it as collateral can drastically change your insurance expense. Once a lender accepts a vehicle as loan security, you often must maintain full coverage insurance on it for the life of the loan. Unless you already use this coverage option instead of carrying liability insurance, you could see additional premiums of hundreds of dollars a year as a result.

When you use stock certificates as collateral, you lose the freedom to trade your investment as freely as you once could. When the market dips, you may even receive a call that a portion of your loan is now immediately due because of the collateral’s decreased value.

Special Factors

Secured personal loan lenders are selective about the kinds of collateral they accept. This adds protection to the lender that they will not end up with a worthless item in the event you default on your loan payments. This also means you must do more research when shopping rates if your collateral is unusual or rare.

For instance, even though high-end sports cars typically hold their value well if you keep up with scheduled maintenance, not every lender will provide a loan using this vehicle as collateral. Those that do may charge higher interest rates because this is a special luxury item. The same holds true for a secured personal loan using rare coins, valuable artwork or jewelry as collateral.

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Repaying Personal Loans

The lending agreement usually specifies the terms for repaying personal loans. As long as you follow this and never pay less, you’ll be fine, but there are times when paying the loan off early has advantages. Other times, it doesn’t make sense to do so. Determining when you should make extra payments can help your credit score and your wallet.

Revolving Personal Loans

The most common type of revolving personal loan is the credit card. As you know, the easy use of this type of credit can cause financial ruin when you don’t pay close attention to how often you pay with plastic. You may also know that making the required minimum payments can mean paying on these personal loans for decades.

To combat the power of compound interest, it always makes sense to make additional payments to your credit cards when you can afford to do so. When the debt you carry on your cards is relatively low, you can look at other kinds of personal loans first for early repayment if you wish. In general, your interest rate on revolving credit will be higher than other loans, so deciding to pay extra towards these accounts is an easy choice.

Fixed Personal Loans

Before you consider paying extra on your fixed-rate personal loans, be sure you review your lending agreement first. Is there a penalty for early prepayment? If so, you’ll need to calculate how much money you’ll save in interest charges by paying off your loan early. When your savings exceeds the penalty, you can start making those extra payments. Conversely, divert your extra cash to another loan or your savings when the penalty is more than you’d save. When the difference is marginal, consider what you could make my putting that money in your retirement account as an alternative.

Auto loans are a special case in the world of fixed-rate personal loans. Even when the amount of money you’ll save with an early payoff is marginal, it may still be to your advantage. Check with you insurance company to determine if your premium will decrease once you own the vehicle free and clear or if there are any coverage types you can drop at that time. The money you’ll save may surprise you.

Special Personal Loans

Some personal loans offer special advantages for carrying a loan balance. In these cases, you must decide if the money you’ll save in interest charges is worth losing the perk. For example, some financial institutions will offer a discounted package of banking and investment products as long as your lending relationship meets a specific dollar threshold. Mortgages and home equity loans allow you the potential of deducting the interest at tax time. In these cases, consider meeting with your banker or tax professional to discuss the consequences of repaying your personal loans early.

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