Unsecured loans are safe if they come from a bank, credit union or reputable online lender that checks your credit, fully discloses the costs and terms of the loan, and takes steps to ensure the loan won’t overwhelm your finances.
The risks have to do with your ability to repay the loan and the impact on your credit. Unsecured loans are so-named because they don’t require collateral; if you don’t pay, rather than losing something like your house or car, your credit score will drop, impeding your ability to qualify for low-interest credit in the future.
If you’re borrowing from a reputable lender, just getting the loan won’t irrecoverably hurt your credit. From there, it’s in your hands to repay it on time and maintain healthy credit.
Finding a safe unsecured loan
Knowing the signs of predatory lending can help you find a safe loan and ultimately avoid falling into a debt trap. Generally, legitimate lenders:
Assess your ability to repay. A lender should check your credit, income and debts to ensure you won’t struggle to repay the loan. If your credit shows you’ve had difficulty making loan or credit card payments in the past, a reputable lender may disqualify you or offer a smaller loan amount.
Clearly display their annual percentage rates. An APR represents the entire cost of a loan. If a lender isn’t transparent about the loan’s APR, you could end up paying a lot more than you planned to borrow. Financial experts and consumer advocates say that 36% is the highest APR a safe loan should have.
Offer fair repayment terms. Your personal loan should be repaid in equal monthly installments, and part of each payment should go toward the loan’s principal. Many reputable lenders have a minimum repayment period of a year or two. A two-week or even two-month repayment period can be unfair to many consumers.
Report on-time payments to credit bureaus. Part of your incentive to repay the loan is to preserve your credit, because legitimate lenders report monthly payments to at least one of the three major credit bureaus: Equifax, Experian and TransUnion.
The monthly payments on a personal loan should fit into your budget without adding much financial strain. Before you apply, check your budget to decide how much room you have to repay a loan.
When you’ve found a safe loan
Once you’re ready to get the loan, you can pre-qualify with online lenders and some banks to see what terms and rates they can offer you.
Pre-qualification does not impact your credit score, and it shows you what to expect before you commit to a lender. You can use NerdWallet to pre-qualify and see rates and terms from multiple lenders at once.
Next to credit unions, online lenders offer some of the lowest unsecured loan rates and best loan features, like a rate-beat program or unemployment protection.
Applying for a loan with a legitimate lender will temporarily affect your credit score. The lender does a hard credit pull to access your credit information, which can cause your score to drop a few points.
Your loan application could take 20 minutes to an hour, depending on the lender and whether you have all your application materials ready. The lender will ask for things like your Social Security number, phone number and employment verification.
Once you’ve received the funds, make a plan to use and repay the loan. Put the money into an account that you can easily access, like a checking account. Some lenders give borrowers a small APR discount for setting up automatic payments, which can also help you avoid late fees.