Unsecured loans are loans without collateral. Aside from the requirements set by the lender, you will also be asked to sign some documents for confirmation that you agree to the terms and conditions. Unsecured loans are also called signature credits and although they do not list credit scores as one of the requirements, they still come with higher interest rates because of their equally high default rates. The best lenders have various terms and conditions and they provide different sets of conditions for different types of unsecured loans.
There are three kinds of unsecured loans: personal loans, payday advances and credit card loans.
Otherwise known as consumer credits, these types of unsecured loans are granted on the basis of personal, family and household needs. Personal reasons can be for example medical or utility bills. Family-related expenses could be because of education or trips and lastly, home renovations, purchase of appliances and car repairs fall under the category of household reasons.
Personal loans can either be secured or unsecured. They are considered secured if the borrower can present collateral or he or she can have someone else sign as the guarantor. On the other hand, if there is no collateral or guarantor, approval of these unsecured loans will be based on the borrower’s ability to repay the loan through proof of employment.
The borrower and the lender should come in mutual agreement in terms of the interest rate. If, however, the borrower fails to repay the money owed, claims in court could be filed.
Another type of unsecured loans are called for payday advances. They are short-term loans wherein the amount borrowed plus interest is paid on the next payday. There are a lot of companies online that are offering payday advances and these firms do not normally run credit checks.
Depending on your agreement with the lender, these unsecured loans normally come with your consent to let the lender access your checking account to automatically deduct the borrowed amount, with interest, from payroll checks. However, even the best lenders usually require you to be at least 18 years old, a US citizen and employed.
Although not really considered unsecured loans per se, the use of credit card also falls under this category. This is because whenever you use a credit card, you are borrowing money from the issuer on the basis that you promise to pay it back on the due date. As such, credit cards work on the same principle as unsecured loans.
In the case of credit cards, additional fees are added if the money owed is not paid on time. In some instances, the account might be sent to collections prior to the start of a legal battle.
The problem with credit cards is that they are provided on the basis of the borrower’s credit worthiness. And since banks are the main providers of credit cards, a thorough background check plus a credit report would be required prior to issuance.
All types of unsecured loans have high default rates. They pose great risks to the lender and thus the high interest rates. In addition, all unsecured loans are short term loans so there will be a set limit of cash allowed. In most instances, unsecured loans will only be good for a few hundred to one thousand dollars, depending on the length of the term you choose. So if you are looking for the best deal, the internet will be an excellent place to start.