What is an unsecured loan? An unsecured loan is a loan that can be approved without the need for any form of collateral. Instead of pledging property and assets, the borrower would qualify for this loan based on their credit history and monthly or yearly income. In this type of loan, the lenders do not have the authority or right to take physical assets which may include a home, vehicle, or land if the borrowers stop making payments.
An unsecured loan is also known as signature loans. This is because your signature on the loan agreement is all that you bring to the table when applying. In this type of loan, you are actually promising to repay back the loan, but you don’t back up that promise by pledging collateral.
Types of Unsecured Loans
An unsecured loan can come in different forms. It can come as a personal loan, a student loan or even in the form of a credit card. Shortly, we would be looking at each of these loans just to give you a little understanding of what we are actually talking about here.
Credit cards are one of the most common forms of unsecured loans. Even though people do not think of it as a loan, it is still a loan because you borrow money when you spend with a credit card. After that money is borrowed, you then pay back before the deadline of the loan.
Most student loans are often unsecured. Although most people take money out of their homes to pay for school, some students get pure student loans through the Department of Education. This type of loan is usually unsecured and only given to students.
Personal loans are often available from banks, credit unions, and other online lenders. These loans are unsecured loans you can use for any purpose you want. Getting this type of loans does not require any collateral. All that’s needed is a next of kin and a signature.
Other Types of Loans
There are also different kinds of loans that are out there and not just unsecured loans. There are loans like auto loans, home loans, business loans, or even mortgage. Although it is true that home loans are like auto loans
In a secured loan, lenders can sometimes sell collaterals, but the sales proceeds are sometimes not enough to pay off your loan balance. When that happens, you will lose the asset, damage your credit, and would still owe money on the deal because of a term called deficiency judgment.
What’s more, lenders can even charge penalty fees, which would totally increase the amount you owe. Eventually, lenders can also take legal action and they may be able to take cash from your bank accounts and garnish your wages.
Approval for Unsecured Loan
To get an unsecured loan, you do not need to pledge anything to back up your promise like collateral. In that stead, the lender will evaluate your loan application based on your ability and inability to repay. Lenders would also look at several factors to decide whether or not you’re likely to repay back the loan.