Unsecured loans are any amount of money that has been borrowed from one party to another without the requirement of collateral for repayment security. These types of loans are invariably considered high-risk since the lender does not have any means to oblige the borrower to make payments on time other than legal action. Because of this, most unsecured loans carry higher interest rates than others and are often only available to those with very good credit scores.
Why Take Out An Unsecured Loan?
Most people decide to take out an unsecured loan for small, short-term expenses and emergencies, such as sudden medical crises, an overlooked unpaid utility bill or even funeral costs. Usually set up to be paid back within a week up to a year. The terms vary depending on the amount borrowed and the contract between the lender and the borrower. Without much valuable property, an unsecured loan may be one of the easiest ways of getting the needed funds.
What Are The Kinds of Unsecured Loans Available?
Bank Loans
Banks do not usually extend unsecured loans to just anyone. A customer is required to have a stable income, as well as a credit history that shows a reputation for on-time payments and trustworthiness to even be considered. No collateral means the bank allows unsecured loans simply on a borrower’s word to repay. There are carefully scrutinized and, most of the time, iron-clad contracts to sign and requirement papers to process, but the fact remains that there is no way for the bank to get the money back if the borrower fails to repay the money other than litigation.
Personal Loans
Personal loans are usually between family and friends and are, most of the time, unsecured. These loans are very informal and, more often than not, undocumented. An agreement is made between the lender and the borrower about when and how the money is to be repaid, but there is no way to enforce that agreement.
Credit Cards
Credit card purchases are considered unsecured loans. Companies that provide lines of credit through the use of a credit card have only the customer’s agreement to pay back their card purchases as security. Failure to do so usually only involves extra charges and higher interest rates, but no seizure of assets. A court order in favor of the credit card company after litigation against the delinquent borrower is the only way to seize any asset as repayment.