Looking to take out a loan? Not sure which type of loan works best for you? A lot of your loan decisions may be based on the type of credit that you have. If you have pretty solid credit, you may want to consider taking out an unsecured loan.
An unsecured loan, which can also be referred to as a signature loan, is approved without having to supply any collateral. This is all because of the high credit score that the borrower has demonstrated over a period of time.
Without the carrot of having collateral, many lenders are taking a risk by giving someone an unsecured loan. Since they are taking that risk, borrowers may see higher interest rates. If the borrower's credit score isn't up to par, some lenders will allow a co-signer to take on the legal obligations if the borrower isn't able to fulfill their payments.
Unsecured loans can be set up as revolving or term loans. Common unsecured loans include credit cards, personal loans, and student loans. A revolving loan has a credit limit that the borrower can spend, repay, and then spend again. As long as repayment is happening, money will be available for the borrower.
A term loan is set up so that the borrower repays the loan in equal installments until the loan is fully paid off. The borrower is given a certain amount of time to pay off the loan and a monthly payment schedule is typically set up.
A consolidated loan is used to pay off big-ticket items such as credit cards or obtaining a signature loan from a bank would allow a consolidated loan to remain unsecured. This type of loan can be used for bigger projects that you may have coming up or just an emergency fund of money that you will only have to pay back if you use it.
If the borrower is not able to make payments with an unsecured loan, the lender can take actions such as reaching out to a collection agency or take the borrower to court. If the borrower loses in court, all of their wages may be sent to the loan or a lien could be placed on their home. These are just some of the repercussions that lenders can take without having collateral in their possession.
Important Takeaways
If you feel as though you would qualify for an unsecured loan, just be sure to keep in mind the following:
- This type of loan is only supported with a strong credit history. No collateral is used in this type of loan.
- When searching for unsecured loans, know that they can also be referred to as personal or signature loans.
- Unsecured loans are risky for lenders so to protect themselves, the borrower can expect to see a higher interest rate than more normal loans.
Having great credit and not having to worry about having to put up any collateral makes this ideal loan for you if you qualify. No matter what loan you take out, it is important to never be late in your payments and be reasonable with what you can afford to pay off each month.