unsecured personal loan

What Is an Unsecured Personal Loan?


Are you desperately in need of more money than you have in your bank account? Sadly, running short of money is not an uncommon situation these days.

That’s why so many people are looking for reliable financial institutions where they can borrow what they need. And their preferred type of loan is the unsecured personal loan.

If you’re not familiar with this type of loan, don’t worry. This article will explain its basic features. You’ll soon understand why it could be the answer to your financial problems.

What is an Unsecured Personal Loan?

If you have a credit card, you’ve already received one of the types of unsecured loans. You may also have student loans. That’s another type of unsecured loan.

In order to receive the credit card or student loan you didn’t have to present collateral to the lender. Collateral is an object of value equal to or greater than the loan amount. For example, you didn’t have to surrender your grandmother’s diamond ring to the lender.

But if unsecured personal loans don’t require collateral, how do they work? A financial institute grants an unsecured loan based on your credit background. So you must have a fairly good credit history to qualify for an unsecured loan.

Why Lenders Prefer An Excellent Credit History

Unsecured loans represent a sizable risk for financial institutions. Why? If a person fails to repay the loan, the lenders have to spend time and money to recoup their losses.

For example, office resources have to be devoted to sending letters and phone calls to try to prod you towards making payments. Some lenders hire third-party collection agencies to attempt to collect the debt.

If that fails, the lender may have to take legal action. Legal proceedings will cost the lender even more time and money. 

What is a Co-Signer?

Often a lender will try to limit its risk of not getting paid by asking you to provide a co-signer. If you fail to pay the loan, the cosigner becomes responsible for paying.

The co-signer would be someone with a credit rating that’s high enough to satisfy the lender. The idea is that the co-signer has an established track record of repaying loans, such as credit card debt. The lender reasons that the co-signer will pay your loan rather than risk damage to their credit score.

Why Interest Rates Are Higher for Unsecured Loans

Another way lenders try to protect themselves is with interest rates. It’s not unusual for an unsecured loan to carry a higher interest rate than the same-sized secured loan.

Often high interest will prompt borrowers to repay loans as quickly as possible. That mindset increases the chances that the lender will receive payment on time.

But if the borrower fails to repay the total loan, the high interest rates still help the lender. The lender receives more money with each payment than he would with a low-interest secured loan. 

The Long-Term Effects of Not Repaying an Unsecured Loan

Failing to repay a loan can have financial consequences for years. For example, a lender could win a court case against you and have the court place a garnishment on your wages.

That means that each time you receive a paycheck, your employer would have to withhold enough of your salary to satisfy your next loan payment.

Another way failure to repay a loan can hurt you is through a lower credit score. Generally, your credit score will remain the same or improve if you pay a loan on time each month. In contrast, your credit score will likely fall if you make late payments.

A bad credit score could disqualify you from future unsecured loans for years. As a result, you might find it difficult to receive a credit card or rent an apartment.

A low credit score can also impact your employment as some sensitive jobs require you to undergo a background check that includes your credit history.

Installment vs Revolving Credit Arrangements

Your unsecured loan could be an installment loan or a revolving credit loan. An installment loan comes to an end once you repay an agreed-upon amount. If you need additional money, you have to complete the paperwork to enter into a new loan.

In contrast, with revolving credit, you don’t have to pay the total balance before receiving additional credit. Let’s notice how these two types of personal loans work in the real world.

How an Installment Pay Plan Works

Suppose you borrowed $500. The lender gives you the money as a lump sum. And your agreement states that you’ll repay the loan in three months.

For three months, you faithfully make payments. When you pay the final balance and interest, your obligation is over. You’ve repaid the debt.

If you wanted to borrow more money, your lender would draw up a new agreement for another loan.

How Revolving Credit Works

Now let’s compare the installment loan with revolving credit. Imagine that your credit card has a $500 limit.

You can spend as you please until you reach your limit. But you don’t have to pay off the entire $500 before you can use the card again.

Instead, you simply have to meet your monthly payment obligation to lower the balance. You can then continue using the credit card.

The permission to use the credit is like a revolving door. As long as you remain up-to-date with your payments, the “door” is open to you to use the card.

Using Installment and Revolving Arrangements Together

Both installment loans and revolving lines of credit can have places in your budget. A credit card can help you when you need money in an emergency.

And an installment loan can not only help you in bad times, but it can also make it easier for you to stay within your budget. How? The personal loan is for a fixed amount. So you know that you can’t spend more than that amount.

Get Your Unsecured Personal Loan Today

If you’re struggling to meet your financial obligations, there’s no reason to keep enduring the stress. Get a fast loan and get some much-needed relief.

Contact us today to arrange an unsecured personal loan matching both your needs and your budget.

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