Unsecured loans are different from loans you might be familiar with such as home and car loans. Learn what unsecured loans are, what it means when a loan is unsecured, and the different kinds of unsecured loans you can get.
What Does It Mean When a Loan Is Unsecured?
When a loan is unsecured, it means that it has not been backed by any collateral from the borrowers.
On the other hand, a secured loan is one that you offer collateral to the lender to obtain.
For example, car loans and mortgages are common types of secured loans because if you fail to pay the bank, your car or home may be repossessed.
This is not the case with unsecured loans. Because you won’t be putting up any collateral in order to obtain one, your interest rates will generally be higher and you will be given less time to pay off the loan. However, unsecured loans allow you to access your funds faster and if you have good credit, you may be able to find a more competitive interest rate.
What Kinds of Unsecured Loans Are There?
There are two types of unsecured loans you can choose from: a term loan and a revolving loan. With a term loan, you borrow a certain amount from the bank and you pay the entire loan off in monthly installments. A revolving loan, on the other hand, allows you to pay off a portion of your loan and if you choose, you can respend that money before paying off the entire loan amount.
Why Do Banks Give Unsecured Loans?
Banks offer unsecured loans to give consumers the opportunity to get the funding they need for numerous purposes, such as starting a business, making home improvements, paying for a wedding, or consolidating existing debts.
Although these loans can be a great opportunity for consumers to reach their goals, they can also be risky for banks because unsecured loans do not require collateral from the borrower to guarantee them. You can, however, pay a higher interest rate on an unsecured loan, depending on the lender you use and what your credit history looks like.
Where Can I Find an Unsecured Loan?
If you’re looking for an unsecured loan, there are several lenders that you can choose from.
Unsecured loans are offered from banks, credit unions, and online lenders.
Each type of lender has its own process and its own criteria for evaluating potential borrowers.
For example, online lenders use a short prequalification system that allows people to complete an application within minutes and not have their credit score affected because this process involves a soft credit check. Once you are preapproved for a personal loan, there are several things you can do to optimize the amount and terms of your loan.
On the other hand, banks do not offer a prequalification option, so in order to get a loan, you would be required to undergo a credit check that can affect your credit score, though usually only by a few points. In addition, you may be required to apply for the loan in person. The upside is, if you apply for a loan from a bank you already do business with, you may be able to get a larger loan amount and a lower interest rate if your account is in good standing.
What Happens if an Unsecured Loan Is Not Paid?
After getting an unsecured loan, you could have difficulty making the payments if your financial situation changes. However, keep in mind that if an unsecured loan is not paid, there can be serious consequences for your credit rating.
If you don’t pay your bill past the grace period, which can be 10 to 15 days, your account is considered delinquent. This will put you at risk of being charged late fees, which can range from $15 to $40.
In addition, your late payments will be reported to the three credit bureaus, which can decrease your credit score up to 100 points. Also, your lender will begin to contact you by phone or mail to remind you to make your payments.
If you continue not to pay your bill, your loan may be placed into default. This is done in between 30 and 180 days, depending on where you took out your loan.
When your account gets to this point, it will do further damage to your credit score, and your lender will increase its attempts to get payment by using its in-house debt collection department or a collections agency to contact you frequently about your account.
Even at this point, you may still be able to work with the bank in order to come up with a payment arrangement that works for you. Otherwise, the longer this goes on, the more at risk you are of additional consequences, like getting sued. A judgment against you will continue the decline of your credit history and make it difficult to get any kind of credit accounts in the future.
