What Are Unsecured Loans?

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What is An Unsecured Loan?

Unsecured loans are loans that are approved without the need for collateral. Instead of pledging assets, borrowers qualify based on their credit history and income. Lenders do not have the right to take physical assets (such as a home or vehicle) if borrowers stop making payments on unsecured loans.

These loans are also known as “signature loans” because your signature on the loan agreement is all that you bring to the table. You promise to repay, but you don’t back up that promise by pledging collateral.

Creditville Limited loans do not require collateral and it falls under the unsecured loan category.

Considerations for Approval for Unsecured Loans

To get a secured loan, you do not need to pledge anything as collateral. Instead, the lender will evaluate your loan application based on your ability to repay (as opposed to the lender’s ability to sell your assets and collect what you owe).

Lenders look at several factors to decide whether or not you’re likely to repay:

  1. Your credit: Lenders check your borrowing history to see if you’ve successfully paid off loans in the past. This is called carrying out a credit check.  Based on the information in your credit reports, a computer creates a credit score, which is a shortcut for evaluating your creditworthiness. To get an unsecured loan, you’ll need good credit. If you’ve done very little borrowing in the past (or you have bad credit because you’ve fallen on hard times in your past), it is possible to rebuild your credit over time.
  2. Your income: Lenders want to be sure that you have enough income to repay any new loans. When you apply for a loan (whether secured or unsecured), lenders will ask for proof of income (statement of account). Your payslips and bank statements will most likely provide sufficient proof of income. Then, lenders will evaluate how much of a burden your new loan payment will be relative to your monthly income. They typically do this by calculating a debt-to-income ratio. They will also check if you have any loans currently on your income. Any loans you currently have will reduce your income as the financial institution will most likely work with the amount left after all loans are deducted.

If you can’t qualify for an unsecured loan based on your credit and income, you might have to consider other options.

Important features of an unsecured loan

There are few characteristics that are keys in the case of unsecured loans :

  1. No collateral: for unsecured loans, there is no collateral required. That’s why for a short-term loan or small amount, the borrower can think of unsecured loan. It usually ranges from 1 month to 24 months loan tenure.

The creditworthiness of the borrower is important: Since the lender doesn’t have any backing in offering the loan, creditworthiness of the borrower is so very important. And before offering any amount, the bank/financial institution first checks whether the person taking the loan has the creditworthiness to pay off the amount in near future.

  1. Higher interest rate: Since there’s no backing for an unsecured loan, the interest rate is much higher than the interest rate for the secured loan.
  2. Smaller amount: In the case of an unsecured loan, usually, the amount is much smaller. Every bank/financial institution has a limit till which they will offer a loan without any collateral. If the borrowers need to borrow more money, s/he has to produce collateral against the loan amount.
  3. Great personal loan: Unsecured loans can be great personal loans as well. If you need money immediately and can’t take from anybody around, you can go to the bank and ask for a personal loan. If the bank finds you to be a good fit in the scale of credit-worthiness, they will offer you a loan without any collateral.

Advantages of unsecured loans

Unsecured loans are easier to obtain than secured loans because you do not need to supply collateral. While lenders can seize the collateral if you default on a secured loan, a lender cannot take any of your property if you default on an unsecured loan unless he obtains a court order.

Finally, if your business files for bankruptcy (in case of a business loan), the court may discharge unsecured loans, but it will not typically discharge secured ones.

Disadvantages of unsecured loans

Because unsecured loans are more risky for lenders, they usually include higher interest rates than secured loans, which means you will pay more over the life of the loan than it would have paid for a secured loan of the same amount.

Higher interest rates also cause individual loan payments to be higher and more difficult to afford. Finally, unsecured loans are harder to qualify for. If you have a poor or nonexistent credit history, the lender will most likely not approve your application.

 


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