Loans come in different shapes and forms and are subject to different requirements. They can range from long term secured loans such as mortgages, to short period cash advances between pay checks. They vary between secured or unsecured; a reasonable monthly payment or an exorbitant drain on your finances. They can be subject to credit checks, or not. There is a personal loan available somewhere for most people, but some have access to much better options than others.
Personal loans may be required for a myriad of reasons, from financing a vacation or home improvements; for debt consolidation; purchasing furniture or appliances; even to obtain an education. An unsecured loan is simply the general term for any kind of personal loan which requires no collateral. If you take Granny’s ring into the pawn shop for a quick cash loan and retrieve it at the weekend, you have provided collateral. If you take out a mortgage the house you purchase acts as collateral. In both cases you risk losing your collateral if you don’t make the agreed payment on time.
With an unsecured loan you don’t promise any collateral in return for the funds, so you are risking less. On the other hand the lender is risking much more, thus the cost of an unsecured loan will be much more than the one with collateral. An unsecured loan from a reputable lender will still carry fees and a higher interest rate than a secured loan, and less reputable lenders charge even more for the service.
Unsecured loans are then divided into those which require credit checks, and those which don’t. The customer who has an excellent standing with their bank combined with a high credit score is able to obtain a personal loan on much more favourable terms than the customer who has a less than perfect record.
Nevertheless banks will advance loans to people who do carry debts, such as credit card debts, so they can consolidate them into one more convenient payment, generally at a lower rate than that on the credit cards. Those with bad credit or no credit can also obtain unsecured personal loans. The proliferation of advance cash payday loans is one example where a person with a bad credit history can still obtain an unsecured loan.
Unsecured loans also have the advantage of being obtained in a much speedier time than secured loans, which require more underwriting. With an unsecured loan a decision can in some cases be made instantly, which may be necessary for some who need cash immediately.
As with any loan an unsecured one needs to repay in a timely fashion or charges will accrue. If you turn out to be a bad risk you aren’t necessarily going to lose Granny’s ring but you will still be subject to the legal process of debt collection. If you handle a personal loan well from a reputable source it will enhance your own financial standing and result in a better credit score, which should in turn translate into better terms on your next personal loan.