By Kari Johnson on January 17, 2011
.jpg.aspx?width=75&height=75) When you ask for an unsecured loan, the lender does not ask for any sort of collateral in exchange. They look at your credit score to determine whether or not you deserve a loan. This makes it harder to get than a secured loan. The rates on an unsecured loan will be higher, because the lenders do not have the same physical guarantee of repayment as they get from secured loans. These are also harder to receive if your credit score is too low.
Though it may seem that this means an unsecured loan is not as risky as a secured loan, this is not necessarily true. If you fail to pay back an unsecured loan within the time dictated by the lender, interest will accumulate, increasing the amount you owe until you can do something about it. To stop calls from collectors, you may need to employ a credit counselor or even apply for bankruptcy if you cannot handle the debt. The longer you go without paying the debt, the more damage it can do to your credit report.
Sometimes, unsecured loans are called signature loans, because the only guarantee the recipient gives the lender that they will repay the loan is their signature, as opposed to collateral in the case of a secured loan.
Unsecured loans can be simple, like an I.O.U. between family members or an average loan from a bank. Credit cards can also be considered an unsecured loan, as there is no collateral required for the credit card company to give you the money.
As an unsecured loan requires a credit check, it will not likely be of help if you need to pay off debt. It will probably be difficult to get an unsecured loan with excessive debt. Even if you can obtain a loan of this nature with a low credit score, the interest rates will be higher than if you used collateral to obtain a loan. Though the consequences may seem lower if you default on an unsecured loan, your credit score will be damaged.
Before agreeing to an unsecured loan, make sure you understand all of the terms. Also, be certain that you are getting the best loan terms possible. To do this, you can compare loan terms from more than one lender before signing one. Also, pay the loan installments on time to avoid penalties and interest you could incur by paying late.
Whether it is better to use a secured loan or an unsecured loan will depend on how much money you need, how much you can afford to pay, and more. Be sure to do your research before choosing any particular loan. |