Unsecured Loan

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. For example, if a borrower holds a revolving loan of $10,000 and draws down $2,000 of it, then the remaining borrowing capacity is $8,000. Now imagine that the borrower repays $1,000 of that $2,000 drawn. At this point, the total borrowing capacity now rises to $9,000. 

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 to consider all available credit options before opening a new unsecured account since many have ballooning or high-interest rates that trigger based on spending history, the balance you carry, or other potentially risky factors.

Terms loans, also known as personal loans or 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, from home improvements or a much-needed renovation to a vacation or a major expenditure or purchase. Issuance of an unsecured term loan is nearly entirely based on your creditworthiness. When considering an application, lenders evaluate factors such as your credit score, income, employment history, debt-to-income ratio, and possibly your rental or mortgage payment and other financial obligations. However, if you are 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.

Credit Scores of Canadians by Age Bar Graph

It is crucial to shop around, as all lenders will be targeting higher credit score holders, and you may end up 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 more 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 credit 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 works best for you. Term loan interest rates can range from 2.29% to nearly 30%. Given this range, it is best to approach multiple borrowers with a pre-qualification tool that doesn’t affect your credit score to determine the type of loan terms for approval.

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 purchasing power in the form of a physical card. The credit card can be swiped at shop payment terminals or used online. It can also be linked to “digital 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 typically much higher than term loans, given that cardholders who carry a month-to-month balance are a major source of revenue for financial institutions. APRs can be up 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 always to 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. Below is a statistic on the percentage of people who repay their credit card balances in full in Canada. This is without a doubt the most important part of owning a credit card, so make sure you are in the 70%!

Charge cards are credit cards that need to be paid off at the end of every billing cycle, normally monthly. So, if you spend $3,000 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 points or cash rewards, niche concierge services, travel perks such as companion tickets or flight upgrades, or dining experiences. Depending on the card, charge cards usually have an annual membership fee of $100 to $2,500. 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 regular 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 because 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 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 paid, and the benefits are 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 a shopaholic or an impulse buyer, you need to be 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 years after completing your university degree.

credit tips!

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 any time, 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”. Bottom line: if you can’t afford to 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 them 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.

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