Unsecured Loans: General Concepts and Types

Unsecured Loans are a great way to let you borrow money irrespective of your purpose. The money borrowed can be spent on anything you need including starting your own business, paying debts or purchasing some expensive things you have always wanted. These loans, as a rule, do not require any mortgage via real estate, a vehicle, precious jewelry, etc. All that the lender has to be satisfied with, include the borrower’s positive credit history and his promise to pay back. Unsecured Loans are also called “signature loans” as the borrower puts his signature making it the pledge of his word. So, if it appears you don’t have enough property that can be put as a type of collateral for the loan you want to borrow, applying for an unsecured loan seems to be the best solution.

Unsecured Loan

However, before borrowing, make sure you thoroughly understand what is an unsecured loan, which are its principles and what it requires from a borrower.

Secured Loans VS Unsecured Loans

First of all, let us discover the difference between an unsecured loan and a secured loan. The latter is the primary loan type one can get. It implies having something to guarantee the lender he will get the money repaid. If something goes wrong, the lender has the right to sell the mortgage and have all the borrower owes him out of the sales proceeds. Such a deal is no risk for both the lender and the borrower. Once the borrower fails to repay, he has a definite time period before the consequences remind of themselves. And he still can manage to repay the loan and securing his property.

secured vs unsecured, debt

Unsecured business loans, on the contrary, are a great risk to lenders. There is no mortgage to sell if the borrower fails/refuses to repay. Yet, in such frustrating situations, lenders are inclined to take legal actions against borrowers. By suing the borrower, a lender can seize or commandeer his salaries on a legal basis. Surely this will leave an irrecoverable negative result on the borrower’s credit history. Perhaps he will not even be able to get any loan later.

However, the high risk the lenders have to face is justified by the high-interest rates they charge. These are actually much higher than those requested for secured loans. Yet, the presence of a perfect (or at least a good) credit history can change everything. The credit history of a borrower greatly impacts the interest rates. Moreover, a borrower with a bad credit history needs a co-signer who will get the responsibility of repaying the loan once the borrower fails.

How Unsecured Loans Are Approved

We have discovered that for getting an unsecured business loan or one for any other purpose the borrower is not obliged to pledge any property as collateral. Yet, there are still certain factors that lenders pay great attention to before approving. These are:

1. Credit History

The credit history of a borrower registers all his credit reports including delays. This way a lender evaluates the borrower’s creditworthiness and determines whether to trust him or not. The absence of a credit history can be substituted, in this case, by a co-signer. The latter becomes in charge for the loan repayment the borrower failed to fulfill.

2. Income

Another point paid great attention to is the borrower’s income. The borrower’s tax returns, pay studs and bank statements form a sufficient proof he is capable of repaying loans. The amount of a loan the borrower will get depends on his debt-to-income ratio.

Types of Unsecured Loans

Depending on the purpose a borrower is applying to get a loan, we can differentiate the following several types of unsecured personal loans. Getting a closer look at each, you will acknowledge which best suits your requirements and solvency.

  1. 1. Signature loans.
  2. Credit cards.
  3. Student loans.
  4. Peer to peer loans.
  5. Payday loans.
  6. Small business loans.
  7. Business loans with a personal guarantee.

Signature loans have much lower interest rates than many other unsecured loan types. The only thing that the bank or credit union requests from a borrower here is his signature and promise to repay the loan. The latter is to be fulfilled through monthly payments till the whole sum of the loan is repaid.

A credit card is considered another type of unsecured personal loans as the borrower can use the amount on the card and then repay it later.

For getting a student loan the borrower does not need any credit history. A student gets the loan he needs to pay for his education and returns the money once he/she has got a job. Such points as repayment plans, interest rates as well as grace period depend on the organization lending the money.

The peculiarity of a peer-to-peer loan is the point the borrowers gets his loan from an individual rather than a bank or credit organization. There are certain websites allowing people to post their loan requests to find lenders who will fund their loans.

A payday loan is a relatively new unsecured loan type. It provides the money the borrower needs the quickest within all other loan types yet features the highest interest rates.

Getting an unsecured business loan has become trendy for especially startups. As small businesses have little to offer as collateral and find great hardships when applying for a loan, credit organizations and loan companies offer them unsecured business loans.

Another unsecured loan type is the business loan with a personal guarantee. This loan type is much like the general business loan with a certain exception – the individual is the responsible party for the business and not the business. This means when the borrower gets an unsecured business loan, he becomes due to paying back the lender once the business turns out to be a failure. Quite many reputable loan companies today offer impressive unsecured business loans up to $250, 000.