Unsecured personal loans are one of the simplest kinds of loans you can get. The borrower doesn’t even have to put up any collateral, assets, or other property that would secure the loan. This means that if the borrower defaults on the transaction, the lender cannot recoup any of his losses.
Three Kinds of Unsecured Personal Loans
Once you’ve decided you’d like to apply for an unsecured personal loan, there are three to consider:
- Unsecured personal loans can be a type of loan someone gets from a family member or friend, based on a simple I.O.U. or signed document stating the borrower agrees to pay the loan back. The agreement often includes a payback schedule, as well as any interest the borrower has to pay. There are two disadvantages: Any positive payment history isn’t reported to credit bureaus, and late payments or defaulting all together could damage a relationship with a friend or family.
- They can also be offered by a bank, credit union, or other financial institution but depend on factors like the borrower’s history with the bank — such as how many accounts the borrower has with the bank, are they in good standing, whether the borrow uses automatic payroll deposits — credit worthiness, debt to income ratio, and so on. And remember, this kind of loan may result in penalties or negative entries on a credit report if payments are late or the borrower defaults. The takeaway to remember is the borrower’s credit score could suffer, and the bank may deny future loan applications because of it.
- A third type of unsecured personal loans that many people use is a credit card, with the borrower agreeing to the fees, rates, and terms and conditions the credit card company establishes in exchange for issuing the card. This type of “loan” isn’t given out based on factors like home ownership, but rather a promise in the form of a legally binding agreement the borrower will make payments each month at a fixed interest rate, or pay the credit balance in full each month. If the borrower doesn’t meet these obligations, then the card can be closed, and the credit card company will add negative entries to the borrower’s credit report. In worst case scenarios, the credit card company may “sell” the bad debt to a collection agency or even take legal action against the borrower.
What are the Benefits of Loans That Are Unsecured?
- No restrictions on how the money can be used.
- The borrower doesn’t need to offer collateral.
- A more flexible repayment schedule, often with a lower interest rate.
- Build good credit history when utilizing small personal loans through a credit union or bank.
- Demonstrate credit worthiness and reliability to a bank, friend, or family member.
Unsecured personal loans aren’t for everyone but in some cases can be a quick way to not only get money needed for different reasons, but establish credit history in a positive manner.