What is an Unsecured Loan?
Loans can be divided into two types: secured loans and unsecured ones. If you are in need of money but the thought of the bank taking possession of your car, house or other assets in the event of failure of making timely payments is stopping you from applying for secured loans then you can most certainly go for an unsecured loan. So, what is an unsecured loan? This is a type of loan that does not have any collateral attached to it, so in the case that you default the payment, the bank or the lender has nothing to go after.
Another difference between secured loans and unsecured loans is that the interest rate is higher for the latter. This is only right since there is no need of pledging any collateral on the borrower’s part in case of such loans and hence the risks are higher. Unsecured loans are further divided into two categories: term unsecured loans and revolving unsecured loans. Some examples of the term unsecured loans are education loans, personal loans, and payday loans. In case of revolving unsecured loans, the common examples are overdraft, credit card, charge card, personal line of credit and so on.
Unsecured loans are a great alternative to secured loans because not everybody can afford to have collateral pledged to the loan. In fact, many people do not own a car or a house in order to be able to pledge the same; hence they go for unsecured loans. In the case of secured loans, failure to make the payment means that the bank can take possession of the pledged collateral and sell off the same in order to realize money for repaying the loan. As far as unsecured loans are concerned, defaulting on payment would lead to the bank reporting the borrower to credit reporting companies, which would result in a serious blow to the borrower’s credit rating.
Unsecured loans are generally based on factors like the financial status of the applicant and the amount desired to be borrowed by him/her. Although the applicant may not be required to offer his/her assets as a security for the loan, the applicant is certainly legally bound to repay the loan as per the terms and conditions agreed upon. People generally opt for unsecured loans for the purpose of carrying out DIY projects, to consolidate numerous debts into a single one that has a lesser monthly repayment amount and for purchasing cars.
Thus, it can be said in conclusion that an unsecured loan is a great solution for people who do not possess enough equity in their homes for the purpose of applying for a home equity loan. Even though the rate of interest may be higher in case of such loans, it does not make it unattractive to those who do not have assets to pledge as collateral for a loan.