How Unsecured Loans Work (and When You Should Get Them)
When you need to borrow money, you usually have two options: secured loans or unsecured loans. A secured loan is a loan in which you put up an asset, such as a home or car, as collateral, meaning the lender can seize the asset if you fail to repay the loan. On the other hand, an unsecured loan does not require collateral, but it does have some disadvantages.
What is an unsecured loan?
With an unsecured loan, lenders allow you to borrow money based solely on your creditworthiness and income, not any assets you own. Some common types of unsecured loans include credit cards, student loans, and personal loans.
The biggest benefit of an unsecured loan is that you won’t have to risk your property or assets to get the money you need. The downside is that these loans typically have higher interest rates than secured loans to compensate for the increased risk for the lender. Your credit score plays a big role in determining the interest rate you’ll qualify for on an unsecured loan.
When does it make sense to take out a loan without collateral?
An unsecured loan can be a good option in several situations:
You have a good credit history
If your credit score is good to excellent, you’ll likely qualify for relatively low interest rates on an unsecured personal loan compared to other borrowing options such as credit cards.
You don’t want to risk your assets
Without collateral, an unsecured loan protects your home, car, investments and other assets if you have trouble paying off your debt.
You need flexibility
Unsecured personal loans can provide funds for almost any purpose, from consolidating credit card debt to covering emergency expenses.
However, there are times when a secured loan may be preferable, especially if you have poor credit and high interest rates make an unsecured loan unaffordable. Providing collateral for a secured loan may qualify borrowers for lower rates.
How to get a loan without collateral
So, you like the idea of borrowing money without collateral. Can you walk into your bank and ask for exactly that? Not really.
The application process for an unsecured personal loan is more complex. Lenders will look at your credit report, credit score, income, employment status, outstanding debt and overall financial situation before deciding whether to approve you for a loan and at what interest rate.
The most common sources of unsecured personal loans are banks, credit unions, and online lenders. Many allow you to start the process by applying online or over the phone. You will need to provide information such as your name, contact information, Social Security number, income, desired loan amount, and what you plan to use the funds for. The lender will then pull your credit report and other financial data before telling you whether you are approved or rejected.
Overall, unsecured loans offer flexibility and convenience to borrowers with a solid credit history . Just make sure you understand the costs over the life of the loan and have a repayment plan in place. By weighing your options, you can decide whether an unsecured loan is the right choice for your situation. Moreover, here are tips for paying off loans early .