There are these basic two types of loans but don’t just go by their name because, in reality, they come up with unique meaning while Defining. In this article, we will be talking about an Unsecured loan, how it works, types of unsecured loans, pros, and cons in-depth and an overall evaluation with basic interpretation of unsecured loans. We are also going to tell you some of the names of top unsecured lenders. Lenders are trustworthy and have a very good reputation in loan providing.
Stick with us and keep scrolling down to quench your thirst for knowledge in case of an Unsecured Loan.
What Is an Unsecured Loan?
Unsecured loans are that kind of loan which does not require any sort of collateral pledged to borrow, which one needs is to provide is their income statement and also their credit score. So, if you have a bad credit score which is below 580 then you might suffer to get an unsecured loan. This is why people are so concerned about keeping their credit score positive.
In the case of a secured loan, the pledge is one that needs to give the lender something collateral or maybe a co-signer and which is still the same. People in secure loan mortgage their car, houses, lands or title but this does not happen in Unsecured Loan.
There is another name of this Unsecured loan, It is known as “ Signature Loan”. The only thing that you place on the table is a simple signature by you where you agree to pay them the loans back. Even if you fail to repay them back they still have no right to take away the physical assets because this is the terms of Unsecured loan but still It does not mean that you are free to go without the repayment. You are not forgiven. You might need to go to the jury.
How an Unsecured Loan Works
Unsecured loan works in a very simple and straight forward way. Where after you lend the money as a borrower, you are obliged to keep regular paying until the whole amount is fully paid. The word unsecured means lender who is providing you money has no security and this is why they are demanding a higher interest rate out of your borrowed money, this higher interest rate is understandable in Unsecured loan.
Basically Unsecured Loan has a bit higher interest rate but no pledge against your physical assets and also another thing is you might think that he didn’t mortgage anything so how can it harm my physical assets?. if you are put under default then the lender will mark you as a delinquent. The jury will forcefully take your car, land or maybe something valuable for the pawn. The worst part is if they get less money selling your goods then you will still be owing them more money.
Unsecured loan example
There are many examples of Unsecured loans, Like normal credit card debt, personal loans, loans from a credit union, consolidation loans, and even term loans can be under Unsecured Loan.
These loans can repeat in a circle and are not collateral. This is the basic principle of being an Unsecured Loan. If this principle is found in a loan then that will be an example of an Unsecured Loan.
Approval for Unsecured Loans
The lender will go through different sorts of assessment to check that if the applicant has the ability to pay his loan back following all terms. If you go for an unsecured loan then there is no need of pledging anything as collateral and another thing is the borrower will not be judging you based on what he can get selling your assets because the judgment is basically based on your income If you have the ability to pay them the money back. If they think that you have the ability then you will be getting the loan from them.
An Unsecured Loan vs. a Payday Loan
The first thing is both of them falls under unsecured loan but the truth is we can not say that payday lenders are truly unsecured in traditional senses. The reason is not that they were a predatory lender with a very high-interest rate but the actual reason is they do something twisted instead. They sometimes make the borrower sign some post-dated check and if they fail to repay the money then the check will go in action. They also have another policy that is done mostly by online payday merchants and what they do is make the borrower pay a certain percentage of online sell-through payment processing services.
But real Unsecured loan is very simple and no mortgage and not any twisted policy to take back borrowers repayment, It is simple and if anyone fails to do that then the Unsecured lender’s only option is to go to the jury.
Types of Unsecured Loans
Unsecured loan comes in different forms like for example credit card, student loan and personal loans and that also works in a revolving term, as we go on with short description of these things; you will be able to know more about all kind of Unsecured Loan.
- Credit cards
Credit cards are the most common forms of Unsecured loans. People might even think of it as an unsecured loan. Many people tend to think that this is some sort of service. At the end of the day you draw money and borrow money from a credit card then all there left is an Unsecured Loan.
- Student loans
Student loans are unsecured loans. They are not based on any pledge or lien. There is nothing collateral in the case of student loans. But sometimes people seen to bring money from houses but still, that is not something collateral. The lender is not going to take over your physical assets but It’s only real when a student has taken a subsidized or Unsubsidized loan from their government aid, but private groups can do something against you in this case.
- Personal loans
Personal loans can be for any purpose. This is a very common form of Unsecured loan and most of the people of this world use this loan. You can take personal loans from Banks, Credit Unions and even from private lenders. There is no collateral pledged for private loans. The lender might judge your credit and Income. In some cases, credit does not matter but that might cost one a bit higher interest rate for the lender’s risk.
- A revolving loan
This revolving plan is another kind of unsecured loan that has its own circular flow of credit transaction where one can be spent then repay, then spend again. This flow keeps ongoing as long as you repay the money following the lender’s terms and conditions.
Examples are Personal lines of credit and credit cards. There is one condition which is that the amount one can borrow is limited. Authority sets how much you can borrow and that’s the limit. No other option to change the amount you can borrow.
- A term loan
A term loan is a monetary loan that one has to pay in equal instalments. The difference of term loan with consideration to any other loan is that it does not have a fixed interest rate. As times keep flying the interest rate slowly adds up with the overall amount. And this is how term loan works.Many term loans are under secured loan but there are unsecured term loans too.
- A consolidation loan
Consolidation loan means when many small loans are kept under one large loan. You will get one single interest rate and you can pay all those loans just by paying one simple loan. This makes life easier and nobody likes to take extra trouble. Paying credit card debt or signature loan in a bank considered as consolidation loan. That is also an Unsecured Loan.
- Compare and Contrast
This is for your better understanding of what loans are considered as an Unsecured loan. This will help your knowledge.
- Auto loans
Car Loans or Car title loans both are under Auto loans. When someone takes a loan for buying a car falls under-car loans. When someone takes out cash providing the lender a lien on his car title. It is a car title loan. If someone takes any of these two loans but somehow fails to repay the loan then the lender has the right to take away their car. A kind of secured loan.
- Home loans
Imagine you take money to buy a house or maybe mortgage your house to get some money. Failing to repay the money could actually cost your house. By the law of foreclosure, the lender can take over your house. This is a secured loan.
- Business loans
Secure loan but it can be unsecured too. Depends on the lender, If he demands that the borrower need to keep something that will guarantee the repayment then the borrower needs to pledge something as collateral. It can be “unsecured” with a higher interest rate.
Benefits of unsecured personal loans
There are different types of benefit of using unsecured personal loans. Benefits of unsecured loans are given below:
- No risk to your personal property
If you end up not paying your loan because of unforeseen consequences then they might not take away your home or any other assets. This is one great opportunity.
- Different sorts of use
You can also perform other purposes ranging from grom vacation to the wedding through debt consolidation. This has a different sort of uses.
- Quick Application Process
If someone plans to apply online for an unsecured loan then the process is very easy and you can do it in no time. In some cases, you can do the whole thing within an hour.
- Lower Interest rate than many credit card
Many people pay their debt with a credit card at a higher rate but its a loss in some cases. Consolidate your loan and put it as a personal loan. Then you pay at an aggregated lower interest rate.
- Control over your repayment
You do have the control over your payment and you can select how you are going to repay them the money. That’s how you already have an idea of how many years you will be totally debt-free.
What to watch out for with unsecured personal loans
There are some topic to watch over when you are thinking of going for unsecured personal loans
- Interest rate
This sort of loan does not have anything as collateral. That is why the interest rate might be a little higher in that case. It can range up to 5 to 35 %. This is why you need to look for loans with better interest rates according to your needs.
- Origination fees
Some lenders are out there to cover up the loan with some extra charges. That can range up to a 1% to 6% interest rate. Try to avoid these extra fees if possible.
- Prepayment Penalties
There are some payment-related penalties like even if somebody wants to make payments earlier. If you go for covering the payment earlier then some of the lenders can charge you extra for that. Try not to go for those organizations.
When to use an unsecured personal loan
Sometimes when you think of unsecured personal loans there it can help you in many ways compared to other loans. For example, if you are repaying debt in high-interest rates there instead of that try consolidating your loan in a single unsecured personal loan. The benefit this loan will provide you is repaying the loan at the lower single interest rate.
Many people take this kind of loan for vacation and other unnecessary investment. Try to use them for necessary things. But if you think this is an unsecured personal loan is not for you then you can go for another loan. A home equity loan or maybe the line of credit.
SECURED LOAN VS. UNSECURED LOAN : WHICH IS RIGHT FOR YOU?
A definitely secured loan is better for you but you need to be worthy of getting a secured loan. You need to have good credit and a running income so that you can pay them back. When you pledge something as collateral then it is bad for you because you have the risk of losing. This is why an unsecured loan is the better option.
Types of lenders that offer unsecured personal loans
We are gonna talk about some of the top online lenders and their different offering on unsecured personal loans:
PersonalLoans.com : here you will be getting the money directly from the lender.
Prosper : Focused on good credit holders. It’s such a marketplace that will give you an interest rate at a competitive edge.
Payoff : It has a unique specialty at consolidating loans which has a high-interest rate.
Best Egg : Their minimum loan amount is quite lower than other lenders.
LendingClub : On average they can reduce their interest rate by 24%.
Special Considerations for an Unsecured Loan:
This is a very special case for unsecured loans. To understand, First, what we will be needing is understanding what happens in secured loans. Being default in a loan is a financial term which means that one is not repaying his debt. He is reducing his credit score. This happens in case of a secured loan. When a borrower is on default the lender has the right to take away what was set for collateral.
Now here we are talking about an unsecured loan. There is nothing set as collateral. This is why the lender can not just come and take something. There are some things that the lender can do. Which are either they can commission any collecting agencies to collect the loan on their behalf. They can also go to the court. The borrower’s wage will be garnish. The court might order the borrower to pay them the money back or put a lien on their assets.
They are people who lend money and they can be an individual or a Union or Organization. They can not take anything as collateral.
Let’s give an example of this sort of lenders: Suppose BCA bank gave someone a loan than without anything collateral. They will consider as an Unsecured Creditors.
Lines of Credit (LOC)
This is a preset amount of money to lend. Bank or Credit Union will provide the money to the borrower. One can take any portion of the money and based according to his needs. The borrowing limit is the maximum amount. One can not take more than that.
Overall this unsecured loan comes up with some great sets of benefits and way better option than predatory and other high-interest rates demanding loans. It is a good investment if you go for an Unsecured Loan.