Unsecured Loans: Know Your Facts Before Applying
By Sharon Secor,
LendersMark.org Staff Writer
When deciding on what type of loan you’d like to apply for, knowing your facts is essential to making the best financial choice for you. When shopping for the right loan for you, you’ll see that there are a variety of different types, as well as an assortment of term, conditions and interest rates, all of which will affect exactly how much the loan will cost you in the end. Among these different types of loan options is the unsecured loan, which – depending on the amount and specific circumstances – can be the right choice for you.
Understand The Term: What It Means When a Loan is Unsecured
The phrase unsecured loan is fairly self-explanatory, as many of the most common loans involve collateral of some sort. For example, with a mortgage, the debt is secured by the property, which serves as collateral. If the debt is defaulted upon, then the lender can take possession of the collateral – the property – and sell it to recoup as much of the outstanding debt as possible. Thus, an unsecured loan is one that is not secured by collateral, but rather is extended upon the signed promise of the borrower to payaccording to specific terms, rates and schedule.
Types of Unsecured Loans
There are a few general types of unsecured loans, and the amount borrowed can range from comparatively small amounts to -- for those with a reliable, good credit history – a pretty significant amount of money. While good credit does have a role in the terms and conditions of unsecured loans, even with bad credit or no credit, it is possible to get an unsecured loan.
When it comes to fairly small amounts of money, one of the more common types of unsecured loan is what is commonly called a payday loan. The laws governing these loans do differ from state to state, as well as internationally. However, there are general facts that do hold true for all payday loans. These typically range from $100 to $1500 and come with a high rate of interest, as they are not secured by collateral. They are often expected to be paid back with the borrowers next paycheck, as these are short-term loans.
Other types of unsecured loans can be obtained through a bank. These include outright cash loans, secured with a signature on a formal document promising to repay the debt via a repayment schedule. A line of credit is another type. Sometimes, this doesn’t come with a set repayment schedule for the full balance, though, like a credit card, a minimum payment is expected to be made at regular intervals.
Costs Associated With Unsecured Loans
The primary cost associated with choosing an unsecured loan is that they usually do come with a higher rate of interest. However, because the debt is not secured by collateral, this is fair – when the rates are not excessive – because the lender is taking a greater risk. The higher rate of interest doesn’t necessarily make an unsecured loan a bad choice, as sometimes that bit extra is worth the convenience. There is often a great deal less red tape to deal with when getting an unsecured loan, as the process is more streamlined, and sometimes there are situations where that can be useful. This is a choice that should be determined by the individual set of circumstances and how quickly the loan is expected to be paid off.
As with any financial decision, it is important to get the facts and run the numbers before making a final decision. Unsecured loans can be the right move in many circumstances when used responsibly by an informed borrower.
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