Need cash? Here is a quick guide to unsecured loans
Unsecured loans are types of loans that are not backed by collateral. This is great for those who need financing but are reluctant to risk any of their assets or cannot pledge any assets as collateral.
If a borrower does not repay the loan, the lender will have few options to get the repayment. Options include reporting your status to a credit bureau, suing you, or referring you to a third-party debt collector.
What is an unsecured loan and how does it work?
If you are looking for a financing option that does not risk losing your assets, an unsecured loan might be the right choice for you. As with any other debt, you agree to repay the loan on time. However, this agreement will not be backed by any guarantees.
Since you won’t be giving any collateral, lenders look for other ways to make sure you can pay off the loan over the long term. You will need a good credit score and sufficient income to qualify. If you currently have bad credit, consider rebuilding your credit first. Additionally, it would help you to know that there are lenders who offer unsecured loans to people with bad credit.
Unsecured loans and secured loans
Unsecured loans and significantly secured loans differ in the need for collateral. When you apply for a secured loan, you will need to provide collateral. Collateral can be any of your assets, like your car, boat, or house.
Suppose you pledged your car as collateral for a secured loan and failed to make the repayments. The lender can repossess your car as payment for the loan you haven’t paid. This is possible because you have given the lender the right to do so by putting your car in place to secure the loan.
However, this is not the case with an unsecured loan. The lender will not have the right to repossess your property as payment for the loan. Hence, you are safe from losing your assets to the benefit of lenders.
Advantage and Disadvantage of Unsecured Loans
As a borrower, the important benefit of getting an unsecured loan is that you don’t put your assets at risk. If you don’t repay the loan, your credit score will wreak havoc and none of your assets.
Since unsecured loans are riskier from a lender’s perspective, they tend to have higher interest rates, adverse terms, and require higher credit scores. Collateral acts as collateral for lenders, and because they don’t have this in an unsecured loan, they have to think of other ways to leverage the loan or secure repayment.
Forms of unsecured loans
There are three forms of unsecured loans that you should be aware of:
Personal loans are mostly unsecured. These are installment loans, that is to say that you are offered a monthly payment schedule spread over several years (2 to 7 years depending on the loan) to repay the loan with interest. This can help you manage your budget easily since you know when to pay off the loan you owe.
This type of loan can be used for almost any purpose, such as if you need money for an emergency such as medical bills or debt consolidation. They are offered by online lenders, credit unions, and banks. Moreover, personal loans can provide you with a lump sum of cash. Therefore, it is ideal for large purchases.
Unsecured credit cards
Unsecured credit cards are the most common type of credit card. A security deposit is not required to obtain the approval of one. This means that the issuer has no deposit to take if you don’t pay off the debt.
Online lenders, credit unions, banks, and other financial institutions offer credit cards. If you are approved for one, you will be able to make purchases at restaurants, stores, online or over the phone at any establishment that accepts credit cards as a form of payment. However, you need to make sure you don’t exceed your credit limit and pay off your debt in full monthly to avoid costly interest or penalties.
Types of unsecured loans
The forms of unsecured loans mentioned above can be either a revolving loan or a term loan. Here are the types of unsecured loans:
- Revolving loan– this type of loan has a credit limit that you can spend, pay off, and spend again.
- Term loan– this type of loan allows you to borrow money to be repaid in several installments until the end of the loan term.
- Consolidation loan– this type of loan makes it possible to repay several debts.
If you don’t want to risk losing your assets by getting a loan, apply for an unsecured loan is a great way to go. It will help you if you keep in mind that most unsecured loans come with unfavorable interest rates, fees, loan terms, and require good credit scores. However, finding the right lender can help you solve this problem. Plus, never forget to apply for an unsecured loan that you can afford to avoid ending up with debt.