As part of an unsecured loan, a lender provides money to a borrower without any legal claim on the borrower's assets in the event of default. This means that the repayment to the lender depends solely on the financial capacity and credit-worthiness of the borrower.
The lender typically offers this type of loan only to preferred clients with whom he has established relationships (the character, credit history and ability of the borrower are well known). The unsecured loan is more common among friends and family members who have a longstanding relationship.
Since these loans are unsecured, interest rates are generally less favorable than for secured loans (loans for which lenders hold a claim on the borrower's assets).
If you are considering applying for a loan or line of credit to finance a major purchase, you can choose a secured or unsecured loan option. The loan and line of credit are secured by assets, which allows you to borrow more money and get a better interest rate. The unsecured loan is approved in a short time because you do not have to give a property as collateral.
When to choose an unsecured loan
The speed of approval and the few paperwork are the main advantages of the unsecured loan. Since a higher credit rating is required since no assets are pledged, it is often more difficult to obtain an unsecured loan.
If the unsecured loan is obtained quickly, remember that you will probably be entitled to a lower interest rate. Financing the purchase of a vehicle, financing home renovations, paying medical bills and tuition fees, and debt consolidation are the top four reasons why clients opt for an unsecured loan.
If you have debts to repay, it can be helpful to consolidate them with a personal loan. Since interest rates are lower than those charged by credit cards, this solution can help you manage your monthly payments.
Improve your credit with an unsecured loan from bad credit?
Many people get an unsecured loan as a way to replenish their credit rating. For example, suppose you have difficulty paying back a few high-rate debt accounts and that undermines your credit rating. So, you consolidate your accounts with an unsecured loan with a lower interest rate, and you use this new loan to rebuild your credit rating.
You may not know that you can use an unsecured loan from bad credit to improve your credit. In short, having bad credit is not a good enough reason to be disqualified for a loan. This is just one of many factors taken into consideration during the approval process. A bad credit score does not prevent you from applying for a new loan. Obtaining a new loan will help put your finances back on the right track.