Probably the biggest difference in deciding on a loan is if it is a secured loan or an unsecured loan. Many people tend to struggle with the difference between the two. We are here to provide you with the difference and help you understand how unsecured loans work.
Understanding what a secured loan is first
In order to understand what an unsecured loan is, we must first look at what might be considered a secured loan. Well secured loans are ones that usually do not require a credit check because they use one of your assets as collateral for the loan amount that you receive. A great example of a secured loan is a car title loan. In order to receive a car title loan, you must have a car title in your name. You input all of your vehicle information and a loan amount is offered based on the value of your vehicle. During the time of your loan period, you are still able to drive your vehicle, however the loan company will hold onto the title until you pay off the full balance of your loan. This is why they do not require credit checks, simply because your loan value is less than what your car would be worth if it was for sale.
In giving up such a big asset as collateral, secured loan lenders believe that you will do everything to payback your loan, which is why they are able to loan you a large sum of money. Now, although many people tend to think that a secured loan might be the better choice, this is simply because it is the easier choice, especially for individuals who might have less than perfect credit. When it comes to getting an unsecured loan, you might find it a little bit tougher to accomplish, but you will not lose such a big asset if for some reason you cannot payback on your unsecured loan.
What exactly are unsecured loans
Well if secured loans are ones that are using one of your assets as collateral in order to provide you with money, then unsecured loans can be seen as just the opposite. Unsecured loan lenders do not offer you a loan amount based on an item you own that has value, like your home or vehicle. Instead, unsecured loan lenders look at a borrower's likelihood of paying back on a loan. This is why it might be hard to obtain an unsecured loan, as they are considered more of the traditional bank loan. Lenders do not have any collateral to fall back on in the case that you miss payments, or do not payback on a loan at all. Unsecured loans tend to come with much higher interest rates, which try to make up for some of the possible loss that can occur if a borrower does not pay back the money they owe. When you decide to apply for an unsecured loan, you have to be prepared for many things to happen.
- First, the lender is going to run your credit, this is just a given. They want to be able to see if you have borrowed before, made on time payments, and can be trusted to continue this positive pay back if they decide to lend you money.
- Next you need to be aware that in applying for an unsecured loan, there is a possibility that this inquiry can show up on your credit report. Although credit inquiries do not make a huge mark on your credit score, multiple inquiries can cause your overall score to drop just a bit. For example, if you are applying for multiple credit cards, and each time are getting declined, this might not be great for your credit report. This is especially true if you want to try and apply for some other form of an unsecured loan. They can see you have been denied previously, and might not want to lend you money.
- Finally, you can expect that your personal income will play a role in whether you get the money you need. Sometimes in order to receive an unsecured loan, they will look at your monthly income, and ask you to provide a monthly budget for items you pay for. This will likely also include spouse information as well if you budget your expenses together.
How unsecured loans work
If you find yourself approved for an unsecured loan you will receive all necessary information regarding the payback process of your loan. You will more than likely be given the term period of your loan, and each payment that must be paid monthly. This should include the interest that will accrue over the time of the loan, to give you one solid month to month payment. In making on time payments, and paying back your loan in full, you can build a solid relationship with the lender, and be more likely to receive an unsecured loan from them in the future.
Different types of unsecured loans
Personal loans are probably the most popular type of unsecured loan. There are several locations specific to offering personal loans, but can also be completed at major banks. Many people find it easier to obtain a personal loan from the location that they bank with because they already have a personal relationship. Credit cards, although might not be viewed as a loan, are actually another popular unsecured loan because you are borrowing money upfront, to be paid back with interest. Student loans are another popular unsecured loan that many young adults can receive in order to pay for tuition and fees.
Hopefully this gives you some basic information to help you decide if an unsecured loan is right for you!