What is an unsecured loan?

Today we’re going to talk about loans. There are a couple of loan options that, at first glance, seem to be similar but can be very different. Let’s take a good hard look at these loan types to make sure that what we’re getting is really worth it!

Signature (personal) loan, line of credit, and payday loans all seem to be the same thing — or at first glance. 

Signature or personal loan: These tend to be smaller loans that you can use for stuff like buying a computer, going on vacation, life’s unexpected emergencies, etc. A signature loan is unsecured, which means the lender is relying on you to pay it back (unlike a car loan or home loan, where your car or your home is the collateral.) The rates might be a little higher because the lender is taking more of a risk. A signature loan is usually a one-time lump sum amount that often has a fixed interest rate – meaning your payments are usually fixed and paid monthly.  (Watch out for: shorter repayment terms and loans with prepayment penalties.)

Line of credit: It is similar to a credit card but without the actual plastic card. It is what it says — a revolving line of credit with an adjustable or a fixed interest rate. Payments are made monthly but the amount is determined by the balance due so each month the payment will be slightly different. Like a signature loan, a line of credit is unsecured meaning more risk for the lender. So, your interest rate maybe slightly higher but not any higher than a credit card. A line of credit can be used for many things like a vacation, your annual holiday shopping, etc. It’s convenient for those expected expenses each year that you don’t want to come out of your immediate cash flow, just move the money over to your checking or savings account and make the necessary purchases as usual. But not completely accessible like your credit card — so it can keep you from making impulse purchases.

Payday loan. Also known as a cash advance loan, this is a small short-term (usually weeks) loan intended to help cover your expenses until your next paycheck. Again, at first glance, this loan sounds similar to a signature loan but it’s really not. The rates are usually very high and there are many fees associated with this type of loan. In general, most credit unions don’t offer this type of loan because it doesn’t help members form good financial habits. This type of loan might seem like a good idea but it can get you in trouble fast. Do yourself a favor — know your worth. Get yourself on a good, functional budget if you haven’t already —that will help you get in the green and avoid the temptation of this type of loan.

I know, it never seems to fail as soon as you start building a good sized savings an unexpected expense pops up. But life is full of unexpected expenses and sometimes they are emergencies. Things like home repairs, vehicle repairs or medical bills can really put a dent in your savings account. Even though you can’t predict these types of things you can be prepared with the financial know how to get you through the hard times while sticking to your budget.

Something else worth knowing: unsecured loans are a good way to establish new credit or rebuild damaged credit. So, if you’re new to the credit world, start with a small signature loan to show lenders that you are responsible and know how to manage your money.

Interested in an unsecured loan? Contact the friendly staff at FTWCCU for more information.