Things to Know about Unsecured Loans
If you need a loan, there are various types that you can go for. All of them come with their own conditions, some of them being convenient – and some of them not quite so. When a secured loan does not make sense to you, then you might want to try with unsecured loans.
The Basics of Unsecured Loans
To understand an unsecured loan, you first need to understand how a secured loan works. Basically, a secured loan means that you must attach a personal asset as collateral. This means that in the event that you miss out on too many payments or default, the lender has the right to sell your asset and recover the money.
This circumstance would seem decent. If we have a home and a well-thought-of repayment plan, it should not be a problem to get such a loan. However, sometimes, a secured loan is just impossible.
For example, if you don’t own, but rent a house. And on top of that, you don’t drive or own a car. In that case, you can’t say that you have an asset that you can offer as collateral – which takes secured loans off the table.
Enter unsecured loans. The interest rates for these types of loans may be relatively higher, but at least you won’t be getting a flat-out “no” from the lender.
Unsecured Loan Types
When it comes to unsecured loans, there are several types that you can go for – some of them being the following:
• Signature Loans
A signature loan is the most common type of unsecured loan. Like its name suggests, this loan is secured by nothing other than your signature. This legal signature binds you to the lender and holds you on the promise that you will pay.
You can find these loans at credit unions, online lenders, and banks, and there are generally no restrictions on what you can use that money for. Other loans restrict you to just buying a house or a car – but an unsecured loan can be used for virtually anything.
• Credit Cards
A credit card is another common way to get some money without having to bring collateral into the discussion. Basically, a credit card provides you with a pool of money from which you can borrow – with the promise of paying the money back within the specified timeframe.
However, it’s very easy to get into debt with credit cards, since the interest rates are generally fairly high.
• Peer-to-Peer Loans
A peer-to-peer loan has you borrowing from an individual rather than a bank. Most of the time, you will be referred to these loans by traditional lenders – or you may simply find them online. They are usually the preferred option since they have competitive interest rates.
Unsecured loans may restrict your choices – but it doesn’t mean it’s impossible. Granted, the interest rate won’t be as attractive as for a secured loan – but it’s the better option if you do not want to put your home or assets at risk.