Late last summer, Jeff Whiting was going back and forth with his credit union about whose name should appear on the title of the GMC Yukon he was trying to finance. So the 35-year-old Austin, Texas, attorney went in a different direction, taking a $45,000 unsecured loan from an online lender instead.
The loan he got in late August – from private lending company LightStream – allowed him to avoid having a lien on the vehicle and also allowed him to sidestep the credit union’s voluminous paperwork and opinions about whether his wife should be on the title. But his interest rate – 2.19 percent – was about the same as he would have received for a traditional car loan.
LightStream, the online lending division of SunTrust Banks Inc., is taking aim at a niche space: Low interest unsecured loans for highly qualified customers. It’s all part of a broader bank industry plan to woo and keep so-called mass affluent customers, and to avoid losing marketshare to new peer-to-peer lending sites that cut out banks altogether, says Greg McBride, senior financial analyst for Bankrate.com.
Niche loans like these “are sparsely available,” McBride said. Credit unions tend to offer small, unsecured loans but at rates far higher than collateral-backed loans.
Larger banks like Citibank and TD Bank have always offered personal loans, but they tend to have higher rates. For example, the average unsecured loan from credit unions is about $2,600, at an average four-year interest rate of about 10 percent, says Paul Gentile, vice president of the Credit Union National Association, an industry trade group.
At TD Bank, which offers unsecured home improvement loans of up to $50,000, interest rates posted on the bank’s website range from 6.63 percent to 9.2 percent for those seeking less than $10,000. Citi’s website says the bank offers a personal loan of up to $50,000 at rates from 6.74 percent to 19.49 percent.
SunTrust Banks Inc. quietly began offering its unsecured “AnythingLoan” of 10,000-$100,000 through LightStream.com earlier this year. To get one of these loans, the customer has to have a good credit score (the average is in the high 700s) and sufficient assets and income to reassure LightStream that repayment won’t be a stretch, says Gary Miller, the SunTrust senior vice president who runs LightStream.
The customer must disclose the loan’s purpose, and then the bank sets the interest rate based on the purpose of the loan. A car loan, for instance, starts at 1.99 percent and tops out at 3.59 percent (if the loan is extended to six years)for those with solid credit scores.
Home improvement loan rates from the site range from 4.99 percent for three years to 7.24 percent for those borrowing less than $50,000 and repaying in seven years. (Nationwide, the average rate for a $30,000 home equity loan is 6.09 percent, according to Bankrate.com).
SOMETIMES, A LIEN IS BEST
There are pros and cons to taking an unsecured loan, especially for homeowners.
Those who don’t have enough home equity to qualify for a second mortgage or home equity line of credit could get an unsecured loan based on their credit score and their assets. Financing could be available for 100 percent of a project rather than limiting the total loan amount to a percentage of the property’s value. Borrowers wouldn’t be risking their property if they failed to repay the loan.
But the interest on an unsecured loan would not qualify as tax deductible, as it would be on traditional home improvement loan, McBride says.
CONVENIENCE COUNTS, BUT NOT A LOT
Interest rates and terms should be more important to consumers than whether or not a loan is secured. But unsecured loans may pull in people who care more about convenience and paperwork avoidance.
Most consumers will find better terms via a secured loan, says Anisha Sekar, vice president of credit and debt at the personal finance site NerdWallet.com. “If you’re sure you can pay off your debt, you’re far better off using a home equity line of credit or other secured loan.”
If the loan is for a short period of time, she suggests considering a zero-percent credit card offer, which could run for up to 18 months before the standard interest rate kicks in. (Most of those offers do have balance transfer fees typically around 3 percent.) Credit cards, of course, are unsecured.
- Charge you late fees
- Send your account to a collection agency
- Report your information to a consumer reporting agency, which may negatively affect your credit score
- Offer to renew, extend or refinance your loan, which may cause you to incur additional fees, charges and interest