There are many different loan opportunities available, but most loans are either defined as secured or unsecured. It is perhaps easy to understand what an unsecured loan is when compared against a secured loan - a mortgage is probably the most obvious example of a secured loan. If you have a mortgage and dont make the payments, sooner or later the mortgage lender will come and repossess your home. Your homes value is the collateral or security - on the loan. A home equity loan or line of credit is also a secured loan as it is secured by the value in your home. A car loan or a loan for other expensive items such as a boat would also be considered to be a secured loan. Unsecured Loans Basically, this type of loan is not dependent on having property or other goods as collateral. An example of an unsecured loan is a credit card debt, a personal loan or line of credit or a student loan. Commercial paper would also fall under this definition. If you dont make the payments on the loan there is nothing as collateral that the lender can come and repossess. Lending money always involves some kind of risk to the lender, especially for a loan that isnt secured by anything. Lending institutions determine the amount that they are willing to lend, the interest rate they will be lending the money at, and how soon they want the money paid back based on how much of a credit risk the applicant is deemed to be. There are generally no restrictions on how you can use the money once you have been approved for a loan. Is an Unsecured Loan Right for You? If you dont have any assets such as a home that you own or you dont want it used as security this may be the right loan for you. An unsecured loan is therefore usually determined by the applicants good credit score rather than by any actual collateral you usually need to have good credit to be approved for such a loan. A credit score of 620 or above is generally considered safe by lenders when it comes to assessing an applicants suitability. Proof of steady or regular income may also be required by the lender. Most people use such a loan if they need a lump sum of cash for such things as college tuition, major home improvements, or an expensive vacation. Pros and Cons of an Unsecured Loan The obvious advantage is that you dont need any collateral or security. Unsecured loans are readily available to renters as well as to homeowners. It is easy to compare rates and features from different lenders and apply for a loan online. There is also usually less time involved in applying for an unsecured loan, and you can usually get the money faster. The main drawback is that the interest rate on the loan tends to be higher as there is no security, and over a period of time you may be making higher monthly payments. Most people take out a loan over a relatively short period of time though, compared to a mortgage for example. You may freely reprint this article provided the following author's biography (including the live URL link) remains intact: About The Author |
