Unsecured loans are loans or debts you can acquire from legitimate financial institutions without the obligation of giving the creditor collateral such as your house among others. This way, the borrower is safeguarded against bankruptcy or liquidation. To know if unsecured loans are right for you, you first have to understand how unsecured loans work.
Understanding Unsecured Loans
Signature loans and personal loans are also often called unsecured loans. This is because they are more often than not used for the same purposes which include home improvements, small purchases like expenses for vacations, unplanned expenditures, as well as gadget purchases. With these types of loans, your creditor or lender only depends on your promise or intention to repay the money.
Clearly, creditors who offer unsecured loans are actually taking greater risks than the borrower because of the lack of collateral. However, unsecured loans have much higher interest rates compared to secured loans and other types of loans. With unsecured loans in general, borrowers make predetermined loan repayments over a prearranged time period. In the event that the borrower repays his loan earlier than expected, penalties will apply.
Unsecured loans are likewise pricier and less flexible than secured loans. They are however considered great borrowing alternatives when you want a short-term loan that you can repay in around one or five years.
Unsecured loans can also come in the form of expenses that you charge to your credit card. To illustrate, each time you use your credit card to pay for a purchase, you readily sign some kind of form that will automatically authorize payment for your purchase. This form is actually an agreement between you and your bank to repay the money you used for your purchase.
So when someone gets a credit card, the loan repayment terms and the loaned amount are likewise predetermined, such that the credit card is the actual agreement between your creditor (bank) and yourself stating that you agree to their terms and conditions every time you swipe that card.
In this scenario, unlike most loan types, you did not acquire the loaned money due to collateral like your home or some other asset for example. Your creditor only holds to your agreement which also includes you agreeing to accrued fees if you cannot repay your loan in the predetermined time period. Likewise, your account may be forwarded to collections where your creditor can sue you for not honoring your agreement.
On the other hand, if for some legitimate reason you cannot repay the loan as promised, such as when your income is reduced, you can actually file for bankruptcy and halt the collection. In most cases, issuers of credit cards do not have the right to coerce borrowers into selling their assets for loan repayment when they claim bankruptcy.
However, once you file for bankruptcy, your all-important credit rating will go from 10 to none. Likewise, if in the future you require unsecured loans, banks or other financial institutions will be reluctant to grant you one because of your bad credit rating. This is why creditors first evaluate a potential borrower’s creditworthiness.
The Advantages of Unsecured Loans
Of course, the greatest advantage of unsecured loans over other loans as discussed above is that if time comes that you cannot repay the money you borrowed; your creditor cannot pressure you into selling your assets or foreclosing on your house because the borrowed money was issued to you without collateral, as stated in your agreement.
In addition, it will be more difficult for your creditor to get back their money in the event you default on your loan. With this in mind however, unsecured loans are more difficult to obtain because of its special circumstances.
Likewise, since unsecured loans are ideal for lower loan amounts, you can actually use it to obtain a personal loan that you can use to increase your credit rating which in turn helps you in acquiring much bigger loans in the future. In addition, since loaned amounts regarding unsecured loans are generally lower than other loan types, this means that they can also be paid back quicker.
The Disadvantages of Unsecured Loans
A disadvantage of unsecured loans is that it is harder to obtain if you have a non-existent or low credit rating history. This is because as stated above, the interest rates given to unsecured loans are a lot higher than what you would expect to pay for secured loans because secured loans require collateral. Likewise, you also have less time for loan repayment.
For those with a low credit rating, unsecured loans are also possible in some cases, but the high interest rates attached to unsecured loans will be higher than usual because the creditor in this case is taking an even bigger risk.
For those with a good or high credit rating, you have an array of choices so when selecting a creditor, important factors should include the creditor’s reputation and the interest rates. Credit unions are actually viable sources of unsecured loans, plus they offer the best interest rates around. If you have a credit union account, you can easily get an unsecured loan from them.
When applying for unsecured loans in the U.S., you are required to be a legal resident of the United States, 18 years of age or above, and you should have a valid SSS or Social Security Number. Likewise, you should have good credit rating and have been under employment in your present job for a minimum of 6 months to become a candidate for unsecured loans.