What is known as an “unsecured loan’ is an amount of cash, which has been lent from one party to another minus any type of collateral to help in securing its repayment. Usually, such a loan is seen as slightly high-risk, due to the lender not normally having any method of making a borrower comply with any terms or make payments on time short of lawful action.
- This is why, many unsecured kinds of loans will carry with them a high rate of interest and are normally only available to people with strong credit scores.
Why People Opt for an Unsecured Loan
In the majority of cases, unsecured loans are taken out mostly for small, short-term expenses, as in a medical crisis or wedding or funeral charges. Most are intended to be paid back within roughly one year, although the terms can vary all depending on the amount and the relationship between both the lender and the borrower.
- If a borrower does not have much valuable property, taking out an unsecured loan may be their one and only method of obtaining access to required funds.
Keeping it Simple
- Absence of complication is another reason why people seek to take out an unsecured loan.
When just small amounts of money are concerned, it is not normally worth the bother of transferring property titles and forming a collateral relationship. A simple contract is usually the easiest way to go forward, even when there are other trade-offs.
Loans from Banks
Customers of banks frequently apply for unsecured loans as a way of obtaining fast access to money. Different to home loans or car loans, that are typically secured by the likes of the house or vehicle, an unsecured loan is given on the borrower’s word to pay back and the same goes for those with bad credit business loans and no collateral.
- There are some contracts to be signed and papers to be processed, however, there is nothing the lender can seize hold of should if the borrower doesn’t repay any of the cash which was lent.
There are Exceptions
Banks will normally not extend unsecured loans to just anyone and the customer will usually have to be in possession of a stable income, and a past history of on-time payments and reliability, so as to be considered.
- However, there are nowadays companies out there which do provide loans for those which banks do not provide.
Unsecured Personal Loans
Nearly all loans that occur between families and friends are usually unsecured and done in good faith.
- Such loans are usually very informal, and are not documented in any kind of writing.
Indeed, high interest rates are one of the main features of nearly all unsecured loans. With the charging of higher-than-normal amounts, lenders are more able to insure themselves against any chances of default.
Borrowers should always be cautious and carefully examine every options and terms prior to committing to any type of loan.