A unsecured loan is a type of personal loan that, like all other types of loans, requires repayment to the lender. This type of loan does not require collateral as security for the amount lent. In other words, unsecured loans do not require a guarantee that the borrower will repay the amount lent.
Unsecured loans are also known as “signature” loans because they are based on your creditworthiness and ability to repay rather than any property you may have pledged against the debt.
Unsecured loans can be used for almost any purpose. Unsecured loans are typically short-term and may be referred to as instalment loans. These types of unsecured loans usually require a fixed monthly repayment schedule until the total amount is paid in full.
What is the difference between an unsecured loan and a secured loan?
A secured loan requires that you pledge some type of collateral in order to secure the amount lent. The most common examples are home equity loans, car mortgages, boat mortgages and probably even condo (or apartment) unit mortgages. In these cases part or all of the amount lent is used to purchase property with the lender having rights over the property if repayment of the debt owed cannot be met by the borrower.
Unsecured loans are sometimes referred to as “riskier” than secured loans. The potential downside of unsecured loans is the fact that they do not require collateral as security for the amount lent.
On the other hand, if you meet certain qualifying criteria and have an excellent credit score then this type of loan can be quite advantageous. You may even qualify for up to $35,000 at some online lending portals!
What are the benefits of unsecured loans?
The benefits of unsecured loans are many. One of the main benefits is that you do not have to pledge any collateral, which means that you do not have to worry about losing your possessions (mainly automobiles and homes) if you can’t make the required monthly payments.
Many unsecured loans are flexible in terms of repayment options – they can be repaid over several months or years, making them affordable for many people who would otherwise find it difficult to repay a large loan amount at once.
Since there is no collateral required, even if you cannot afford to make the minimum payment on time, you will not lose anything other than the interest accrued during each month that you were late with a payment.
That said, there are some potential consequences if you default on an unsecured loan, and these should be understood by anyone who is considering applying for this type of loan.
What happens if I don’t pay back my unsecured loan on time?
Unpaid debts can be reported to credit bureaus, which will negatively affect your credit score, making it difficult or impossible for you to obtain additional unsecured loans or other forms of financing in the future. Credit scores are one way lenders determine whether they will lend money to a potential borrower.
Furthermore, the interest can become quite expensive. If you are one day late in making a required payment, the interest for that particular month will begin to accrue.
Interest is charged by the lender to cover their costs associated with loaning you money, and it is added to your debt each month. If you don’t pay on time, interest may accrue, and this is typically compounded monthly, meaning that the interest on your debt will be added to your existing balance. This can increase the amount you owe quite significantly.
By paying down the principal amount owed, you are reducing the total amount of interest you pay (and possibly shortening your repayment period).
How to get an unsecured loan
There are several types of unsecured loans that can be obtained, some of which may be easier to qualify for than others.
Unsecured loans are a growing segment of the lending market, and many online financial services firms (such as LendingClub) offer this type of loan. One major advantage is that these lenders use very detailed credit scoring criteria when determining whether or not to approve your application, and these companies often use their own methodologies to determine creditworthiness.
This method allows people with poor or no credit access to a loan – one with high interest rates, possibly, but you at least have the money!
The cost of unsecured payday loans is usually extremely high, but they can be a good way to get cash quickly. On the other hand, if you are not financially responsible with these types of loans (borrowing and paying back multiple times per year), many negative consequences may ensue – especially when it comes time to repay your loan.
If you are unable to make payment(s) on a payday loan, there will almost certainly be fees involved for late or non-payment. By borrowing this type of short-term loan, you should already have some idea as to how you will pay it back in the long run before going into debt. Be aware that most payday lenders charge very high fees and rates – often over 100% APR!
If you are approved for an unsecured Personal Loan this can be a great option, but there is often a catch – your monthly payment may be high in relation to the amount of money borrowed.
Unsecured lines of credit
When getting an unsecured line of credit at a bank or loan company, you will usually have several options (such as number of years and interest rates). If one lender approves you for more than you need, another may approve you for less – you may want to shop around for the best deal.
Things to keep in mind before getting an unsecured loan (or any loan)
If you feel that getting an unsecured loan is suitable in your situation – meaning that it is necessary or beneficial to do so – then make sure that you read all paperwork carefully before signing anything. Remember that if any promises made by third parties are worded poorly (especially if they are verbal promises), they may not be legally enforceable.
Before you sign for an unsecured loan, investigate the company with which you plan to do business thoroughly. Make sure that the lender is reputable and has been around for at least a few years. If there are any complaints registered against them with federal regulators, then it would be wise to look elsewhere for a loan.