What is an unsecured loan? And how does it work?

What is an unsecured loan? And how does it work?

What does an ‘unsecured loan’ mean?

An unsecured loan is a loan where the finance being required doesn’t require the borrower to provide any collateral or security to be held against the borrowing value. Typically, this form of personal loan is offered in a smaller amount than a secured loan and is often charged at a higher interest rate than a secured loan to cover the lack of collateral or security.

How does an Unsecured Loan Work?

Unsecured loans are approved without the use of any property or other assets as collateral. The terms of these loans are most often conditional on a borrower’s credit profile. Typically, borrowers must have a good overall credit profile, as unsecured loans generally pose a higher risk to the lender, as opposed to secured loans. 

An unsecured loan stands in contrast to a secured loan, where a borrower pledges some type of asset as collateral for the loan. The pledged assets increase the lender’s “security” for providing the loan. Examples of secured loans include mortgages and car loans.


What are the pros and cons of an unsecured loan?

Pros

– No-Risk to Personal Property

There are personal loans that are secured, and there are those that aren’t. When a personal loan is secured, it’s backed by collateral that your lender can take if you can’t pay off your loan. The great thing about unsecured loans is that your personal assets aren’t at any risk in the event of a default. So you won’t have to worry about losing your home or any of your other assets if you get laid off and making on-time payments becomes impossible.

– The Application Process Is Simpler

Because there are other lenders besides banks and credit unions that offer personal loans, the process of getting one isn’t as complicated as it once was. You can apply for a loan from a lending site, like ours, from the comfort of your own home. And it’s possible to get approved for one in less than 48 hours. Whether you qualify for a loan depends on your credit history and credit score. Besides that, you’ll need to be able to provide proof that you have a stable and secure source of income.

– You can use it for whatever you like

One of the most significant benefits of an unsecured personal loan is that they are very versatile. Unlike a car loan, a mortgage or a student loan, a personal loan can be used for many purposes — car repairs, medical bills, a dream holiday, debt consolidation, you name it!


Cons

– If You Default, Your Lender Could Come After You 

Even if a personal loan isn’t backed by a particular piece of personal property, a lender may still be able to place a lien on your assets in order to secure repayment. In order for a lender to obtain a lien, they must pursue this matter through court. In addition to paying for the original loan amount you borrowed and late fees, you could be forced to pay for legal fees and court costs. After it’s all said and done, you could end up with a stain on your credit profile and your wages could be garnished as a result of this.  

– Loan Amounts May Be Smaller

It’s no secret that lenders make money by charging interest on loans, but there’s no profit if the loan is not repaid. That’s why lenders go to great lengths to limit the risk of borrower default. They check credit reports, verify employment and in the case of unsecured personal loans, they might limit the amount of money they lend you (especially if your credit score is low).


Which is better when deciding between secured or unsecured loan options?

A secured loan often works best for customers who cannot take out a loan, due to bad credit or other financial reasons. It will improve your chances of being approved and possibly getting better rates. At the end of the day, which loan is best for you depends on your current financial situation and other factors, such as which collateral you can use as security, whether you have good or bad credit, and your credit score. All of these factors should be taken into account before making your decision, as they’ll all influence your application, the amount you can borrow, as well as the interest rate you’ll pay.


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