What is an Unsecured Loan?

Loans are used for a wide variety of reasons including debt consolidation, car purchasing, home purchasing, and personal needs as well. There are different types of loans that are made available to those who have excellent credit, and those who have poor credit as well. Unsecured loans are the preferred choice, but only those who have an excellent credit score will qualify for an unsecured loan. People with bad credit may also qualify for an unsecured loan, but the chances of qualifying are reduced depending on the person’s credit score. The most popular type of unsecured loan is a personal loan.

Secured personal loans are also available as well, but secured personal loans require more documentation and collateral to qualify. An unsecured loan is a type of loan where the borrower does not have to provide collateral to qualify. Car loans are not considered an unsecured loan because the car is used for collateral. The same goes for mortgages. A home loan is a secured loan because the home is being used for collateral. Unsecured personal loans, on the other hand, use no type of collateral to secure the loan. Instead, the lender is going of the borrower’s word to qualify them for the loan.

However, the borrower’s word isn’t the only factor that dictates whether or not the lender will qualify them. Unsecured loans typically require an excellent credit score on the borrower’s behalf. This means that the lender is using the credit score and the credit history of the borrower to determine the amount of risk that borrower may impose on the lender. If the lender feels that the borrower is not able to meet the requirements of an unsecured loan, they will request some type of security in the form of collateral. Credit cards are another example of an unsecured loan.

Credit cards are unsecured lines of revolving credit, but there are also secured credit cards as well. An unsecured credit card is a type of revolving loan where the individual can continue to borrow on the amount of credit the lender gives the borrower. The borrower can borrow on their credit line more than once, as long as the borrower hasn’t reached their limit. If the lender deems the borrower too risky for an unsecured credit card, they will offer the borrower a secured credit card, which requires some form of collateral on the behalf of the borrower.

Unsecured loans are typically offered by prime lenders, lenders who are commercialized banks that are recognized in the markets of being a legitimate lender. In other words, bigger well known financial institutions offer unsecured loans more than subprime lenders. Subprime lenders are typically offered by smaller independent lenders and companies that specialize in qualifying those who have bad credit. Subprime lenders are associated with providing secured loans, while prime lenders focus on unsecured loans. People who have bad credit are advised to use a subprime lender when applying for a loan. Being denied an unsecured loan may damage the borrower’s credit score even more.

The goal that most people should keep in mind is the fact that an excellent credit score will increase their chances of qualifying for an unsecured loan. Individuals who have no collateral and cannot qualify for an unsecured loan will not be able to rebuild their credit score, unless they are paying outrageous amounts of interest. Since an excellent credit score is usually a factor that is involved with qualifying for an unsecured loan, the interest payments on this type of loan are typically lower than secured loans. A person with an excellent credit score is not as much of a risk as someone who has a bad credit history.