An unsecured loan is the one that is not secured by any collateral unlike the secured one; where the borrower offers any asset like their home or car as the collateral. So, the loan is secured with the collateral and if the borrower goes in default, the asset can be taken by the lender.
But unsecured loan does not work like this. You do not have to provide any security in the unsecured loan. But your creditworthiness is an important factor as you must have a high credit score if you want to apply for some forms of unsecured loans.
A credit score is the numeral representation of the ability of a borrower to pay the loan back and it shows your creditworthiness on the basis of your credit history. Default is the term used when a borrower fails to payback the amount of the debt and the interest.
Unsecured loans are also called personal or signature loans as they just require the signatures of the lender and the borrower on the debt agreement and not a collateral. Sometimes, a bad credit history can also get you an unsecured loan if you use a cosigner. A cosigner is your guarantor who would be responsible to payback the debt and interest, if you default.
Unsecured loan is dangerous for the lender as they do not have a security. This is why they give you higher interest rates and pay attention to your credit score and require for you to have a good credit history.
If you are looking for an unsecured loan, you can start your search by checking any website for unsecured loans. You can get many options on websites with different offers, terms and interest rates. So, you can choose the one that suits your needs and situation.
Types of unsecured loans:
There are many examples of unsecured loans, all of which come under two main forms based on the timing of repayment:
There is no fixed time period to pay back the loan so you can repay at your own speed. The monthly payments are minimum but credit limit is fixed and it goes down when you borrow money and goes back to normal when you repay. Examples of revolving loans are credit cards and your personal line of credit. The interest rates for lines of credit are high but usually lower than that for credit card loan.
In this type of unsecured loan, the time duration and the number of repayments, both are fixed. The installments are all equal. A personal loan is an example of a term loan. The duration of repayment is usually set in months or years.
Other examples of loans that can come under unsecured loans include student loan and consolidation loan. Students usually do not have anything to offer as a collateral, so they can get unsecured loans by taking help of their college’s financial aid office.
A consolidation loan can be taken to pay off credit cards or a signature loan taken from a bank. This would come under an unsecured term loan. You can also consolidate debts from many credit cards into one credit card by getting an unsecured revolving loan.