What is An Unsecured Loan?
Unsecured loans are like personal loans, which do not require any collateral. Thus, they are usually reliant on the credit score of an individual. The unsecured loans or signature loans usually refer to the borrower’s credit score before their approval. Lenders do this to protect themselves if the borrower fails to pay them back.
An unsecured loan doesn’t have any collateral to secure their payments. Nearly 35% Americans get a personal loan. They are commonly used for auto loans, emergencies, tuition fee or consolidation of debt.
Types Of Unsecured Loan
There are two types of unsecured loans which we will discuss.
Revolving Loan
A revolving loan refers to the concept where you can use the credit again after repaying it.
- Use the credit
- Pay the bill
- Use the credit again
The cyclic loop will continue until the time period agreed between the borrower and lender expires. Credit cards or credit lines are some of the revolving loans. The term of a revolving loan has a shorter term. The credit card payments are usually not done in installments but they can be paid at anytime you want. The interest rate on a revolving loan is much higher compared to a term loan.
Term Loan
A term loan is like a regular loan without any collateral. There is a fixed term for the loan. Borrowers make repayments in installments. These terms may seem a lot like a secured term loans, mortgage or auto loan. An example of unsecured loans is consolidation loans. A consolidation loan or debt consolidation loan is used to pay off debts. Learn ways to repair your credit score.
The interest rate on an unsecured term loan is particularly lower than a revolving loan. The loan can’t be recalled unless it defaults. Since the installments are made on a fixed period of time, repayments can’t be made at anytime you want. Other unsecured loans are education loans, renovation loans, or personal loans.
Alternative Lenders
Payday lenders commission mortgage loans or auto loans without any collateral. However, they do use other security measures. In order to get the loan, a borrower would have to provide a postdated check, automatic withdrawals or the payment of a small percentage of the loan.
What Happens on a Payment Default?
If the borrower is unable to clear the unsecured loan, the lender doesn’t have any collateral to secure their payment. However, a lender can still resort to other means for getting their money back. The lenders can use a collection agency or bring the borrowers to court. The court can place a lien on the borrower’s home or business if they rule in the lender’s favor.
How Do They Work?
The process to receive an unsecured loan is a lot similar to the other processes. Firstly, you should compare the available options and select the most suitable option. Then, you submit an application for the loan. Since, these loans don’t have any collateral, your credit score will be the sole determinant. After approval, you will receive the unsecured loan.
Revolving loan goes through the similar process. After the approval of your loan, you can continue spending, repay and withdraw.
Advantages of No Collateral Loans
The biggest advantage of an unsecured loan is that you don’t have to submit any collateral. If you are unable to make any payments, your assets are not at risk. Other than that, there are several other benefits.
A borrower wouldn’t have to go through a prolonged application process. An unsecured loan process is much smoother and easier. They only have to review the financial report of the borrower to determine the risk. Lenders other than the bank offer personal loans which is also why the approval process is easier.
Disadvantages
Unlike secured loans, these have a higher interest rate primarily due to the high security risk. In case a borrower with poor credit score are approved for the loan, they’d have an even higher interest rate. The total amount being repaid is more than the loan amount itself.
There is a small drawback to an unsecured loan, the amount of the loan. Compared to other loans, they are significantly smaller. There is no flexibility for the time duration and the number of installments. A revolving loan can be utilized efficiently, if they are paid on time.
If the borrower defaults, they’d still have to face some repercussions. Though the process is easier and smoother, getting approved for the loan is very difficult.
Tips for Poor Credit Score
If you have a poor credit score and need an unsecured loan, the following tips can be beneficial for you.
Revolving Credit Line
To receive approval for your loan with a poor credit there are a few considerations. An important factor that is taken into consideration is the borrower’s income. If you have a poor credit score and a high income, chances for getting approval on a lower limit credit line are high.
Finding lenders that are aware of your credit history could be willing to approve you for the credit line. If your current track records have improved, the associated lender will only need to know your current credit.
Online Lenders
Services established on online platforms offer unsecured loans to all types of people. They offer everyone with the loans, especially people with a bad credit. Online lenders are aware that this particular segment is disadvantaged. So, they allow them to use these loans to help them rebuild their credit rating and rid themselves from debt.
Cosigner
Enlist someone you know with a good credit score to cosign the loan with you. This way, the lender wouldn’t have to worry about your poor credit score and defaulting. You’d have to find a bank that offers personal loans with cosigning.
Conclusion
Unsecured loans are not for everyone but they can be a useful tool in your financial toolbox. Always best to know all your available options before making a decision about your budget and money needs. Hope this article was helpful.
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