Unsecured loans often carry much higher interest rates than secured loans. With an unsecured loan, the lender is taking a chance on you without asking you to put up anything in return. With a secured loan, the lender will ask you to pledge some type of collateral against the amount borrowed. This ensures the lender has some way to recoup their money if you default on the loan. With an unsecured loan, the lender does not have this security so they charge higher interest rates and add many other restrictions to the loan.
These types of loans are typically used for a short-term funding need such as funding a small business or paying back taxes. This need for quick cash often results in the borrower accepting a higher interest rate, especially if they plan on paying back the loan quickly.
To qualify for an unsecured loan, the borrower will usually have to provide proof of steady income. They will also be asked for proof of residence to ensure they have a permanent residence. Lenders are not asking for security or collateral, so the borrower may be asked to find a co-signer. A co-signer is someone who will guarantee to repay the loan if the borrower defaults. An unsecured loan is not a line of credit. A line of credit may be continually used up to the approved amount as long as payments are made on time. A loan that is unsecured is a lump sum that is provided to the borrow at the time of loan closing. Once this amount is gone, there is no more money available without taking out a new loan.
There are several types of unsecured loans. It is important to research all the options before making a decision. Check the interest rates, the repayment schedule and what happens if you are late with a payment.