Personal loans (also known as signature loans) are the loans commonly used to fund home-improvement projects, a college education or perhaps a vacation. There are two types of personal loans--secured and unsecured. Secured loans require some type of collateral (item of value that is guaranteed in exchange for a loan), while unsecured loans do not. Since there is no security to back up the loan should you default, a lender is more apt to charge a higher interest rate for an unsecured personal loan.
Guidelines
Qualifying for an unsecured personal loan, especially one with an attractive interest rate, can be quite difficult, according to FinWeb.com. The lenders' guidelines for making such loans are much stricter than those for secured loans. In order to be approved for an unsecured personal loan, a lender must meet the criteria of a low-risk borrower.
Qualifications
A lender defines a low risk borrower as someone with excellent credit, a good income from a steady job, a low debt-to income ratio, and a solid repayment history. You also will likely be asked the purpose of the personal loan.
Limitations
Banks and credit unions may limit the amount of unsecured personal loans to $2,500 to $5,000. Some financial institutions will not make unsecured personal loans in any amount.
Time Frame
You will probably know within a few days whether a bank or credit union has approved your unsecured, personal loan application. It usually takes about 24 hours for a credit agency to report your credit history to the lender. Once received, the loan usually gets approved or denied in less than 48 hours.
Alternatives
If your credit rating is less than stellar, there are other unsecured personal loan options available, though they will likely come with a higher interest rate. Finance companies specialize in making personal loans. The interest rates can average 5 percent to 10 percent higher than the going market rates. High credit-risk individuals may also consider obtaining a cash advance or pay day loans. These types of personal loans are intended to offer small (typically a few hundred dollars), short-term loans at high interest rates
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