There are two major types of loans on the market today: secured and unsecured loans. Unsecured loans are loans that don’t use collateral as added security for the lenders. In this article, we are going to review some of the basics aspects of unsecured loans as well as take a closer look at several financing options that are categorized as unsecured loans.
Unsecured loans are further divided into two parts. The first half is installment loans. This type of loan allows you to borrow a certain amount of money and pay it back in installments over a predetermined period of time. Revolving loan, on the other hand, gives you a certain amount of loan that you can use at any time. Repaying the revolving loan means you can borrow the amount back in the future.
Loans such as personal loans and payday cash advance are all installment unsecured loans. Lenders are offering these loans at reasonable rates these days, giving you the chance to get the financing you need without spending a lot of money in the process. After taking out the loan, you repay it every month based on the loan agreement.
Credit cards are revolving loans that you can use at any time. The overdraft facility of your checking accounts can also be categorized as a revolving unsecured loan because you can use the loan facility at any time. Interest is added only to the portion of the loan used and for the usage period only.
Similar to secured loans, unsecured loans have interest rates and other charges added to the repayment scheme. The amount of interest you need to pay depends on the loan you are taking out, the lender’s policy, and your overall credit performance. Since there is no collateral placed against unsecured loans, the interest rate is slightly higher than that of secured loans.
One of the major advantages of using unsecured loans is the ease of use itself. You can take out an unsecured loan of your choice in a matter of hours and get the money you need for dealing with financial emergencies or unexpected expenses. Lenders don’t restrict the use of unsecured loans, which means you can use the money for any purpose without an issue.
Use unsecured loans responsibly and you can certainly improve your personal financial state in general. The available loans are perfect for those who need extra cash without the steep monthly repayment amount to worry about.
An Unsecured Loan Is a Loan with No Collateral
Before you can use personal loans effectively, it is critical that you understand the basics of personal loans and how to utilize the financing option to your advantage. In this article, we are going to discuss the basic nature of personal loans along with other basic aspects surrounding this type of loan. You will be able to get started with using personal loans effectively once you have mastered these basics.
As the title stated, an unsecured loan is a loan with no collateral. Personal loans are categorized as unsecured loans because you are not placing any asset as collateral for the loan. Instead, the bank or financial institution lending you the money adds interest to the repayment to compensate for the risk associated with giving you the loan.
Since there is no collateral attached to unsecured loans, no asset will be taken when you failed to meet the repayment schedule of the loan. Although this is a huge plus, it is not something you should take lightly. Lenders may not be able to take your assets away when you failed to repay the loan on time, but they can still take legal actions against you to get their money back.
When used correctly, unsecured loans are actually very useful. Unsecured loans such as personal loans and credit cards are very easy to take out and repay. The term of the loan is flexible for maximum convenience; you can set the repayment term accordingly to make repaying the loan very easy to do.
Another important thing to do when taking out a personal loan is to read the terms and conditions of the loan carefully. Make sure you understand every point in the loan agreement; you need to know exactly what you are getting into before finalizing the loan agreement. Reputable lenders are more than happy to provide you with a draft of the agreement before you may any decision regarding taking out the loan, giving you extra time to review the terms and conditions properly.
Unsecured loans, particularly personal loans, are very useful as personal financial tools. You can use them to fill financial gaps or improve your personal financial state in general. With careful planning, it is even possible to use personal loans as leverage and the source of financing for productive activities such as starting a new business venture. Find the best personal loan deals and start enjoying the benefits of using unsecured loans in no time.
Unsecured Loans vs. Secured Loans
Before you can take out loans wisely and gain the most advantages from using them, you must know exactly what you are getting into. In this particular part, we are going to look further into the differences between secured and unsecured loans. Let’s begin, shall we?
As the name suggests, secured loans are loans or financing options that use collateral – an asset that belongs to the borrower – as a guarantee for the loan. Debtors can borrow against any asset they might have when taking out the loan, including properties, cars, and valuables.
Most loans we all know today are actually secured loans. Mortgage loans are secured loans that use the property you are buying as collateral. Auto loans, naturally, use the car you are buying – or the car you already own in the case of refinancing – as collateral against which the loans are issued.
The amount of money you can borrow by taking out a secured loan depends on the value of the collateral. Banks and financial institutions are often willing to lend up to 80% of the collateral’s value in exchange for a small interest rate.
Keep in mind that failure to repay the secured loan will result in your asset being taken in exchange. All collaterals attached to a bad debt are reviewed and auctioned off to settle the balance.
Unsecured loans, on the other hand, don’t involve collateral. You are simply signing an agreement, which states that you are receiving the financing and will be repaying the loan with interest and other charges added to it. Personal loans are very flexible and can be adjusted to suit your personal financial state perfectly.
Since there are no collaterals involved when you take out personal loans, you don’t have to worry about assets being taken by lenders when you failed to repay the loan on time. The lenders can still take legal actions to recoup the money you borrowed as a debtor.
The absence of collateral also makes personal loans relatively more expensive than secured loans. The lenders see personal loans as having more risks attached to them, which is why they are charging more on interest – and often other charges – to cover those risks.
Which type of loan is best? The answer depends on the situation you are in, your financing needs, and other factors that must be reviewed before taking out a loan.
Unsecured Loans: The Good, the Bad and the Ugly
Unsecured loans are now available in different forms, from short-term loans to personal loans and overdrafts. Even with the higher risk factor, lenders are still offering a wide range of unsecured loans simply because the return – interest and other charges – is bigger compared to secured loans; from debtors’ point of view, unsecured loans are indeed slightly more expensive than secured loans.
The extra flexibility and ease of use are among the many reasons why unsecured loans are very popular on the market. Thanks to online tools, finding an unsecured loan that meets your needs perfectly is also very easy to do. Before you decide to take out a loan, however, you must understand exactly what you are getting into.
The Good – The Benefit of Unsecured Loans
One of the primary benefits of unsecured loans is the easy-to-meet requirements. You don’t have to be a homeowner or have an asset to place as collateral to be able to use unsecured loans. When applying for a personal loan, for example, you only need to be 18 years old or older and have a good credit score to qualify for the loan.
Applying for one is also very easy to do. Credit cards offer revolving unsecured loans; once the cards are approved, the loan is available to you at all times. Installment loans such as personal loans can be acquired from reputable lenders in as little as a few hours.
Unsecured loans are very flexible by nature. You can adjust the payment term so that the monthly repayment amount is affordable. It is even possible to negotiate a better interest rate – or a better offer in general – when you have a relatively good credit history.
The amount you can borrow is unlimited. Most personal loans offer up to $50,000 in unsecured loans, while other types of unsecured loans have different maximum loan amounts respectively.
Unlike most secured loans, lenders don’t govern the use of the loan at all. You can use the money you get for financing any activity, including the home renovation or a new business venture.
The Bad – The Interest Rates on Short Term Personal Loans
It is only natural that unsecured loans are more expensive than secured loans. The extra interest is there to compensate for the added risk lenders are facing when giving you the loan.
The high-interest rate is made even worse when you are borrowing a substantial amount of money for a short period of time. A credit card with 2% interest per month, for example, has an Annual Percentage Rate of over 24%.
Worry not, because there are ways to reduce the cost of using unsecured loans substantially. For starters, short-term unsecured loans, especially revolving loans such as credit cards, have a grace period during which you don’t have to pay interest. If you repay the loan within the grace period, you can actually use the financing option for free.
Don’t hesitate to compare offers and negotiate a better deal when you have to. Since the goal is to get a suitable loan at the minimum interest rate, comparing offers from multiple lenders is the best way to get started.
The Ugly – Don’t Borrow More than You Can Repay
Unsecured loans are very easy to take out; the monthly repayment amount is also very affordable in most cases. The worst thing you can do is use unsecured loans sparingly and without a good financial plan in mind.
Never borrow more than you can afford to repay. Before taking out a new loan, check if your loan-to-income ratio (the portion of your regular income used to repay loans) is higher than 30%. As tempting as a low monthly repayment amount can be, it is still an expense you have to cope with after taking out the loan.
By using personal loans and other unsecured financing options responsibly, you can gain the most benefits without spending a lot of money on interest and other cost elements of using the loan.