Unsecured Loans are not attached to any collateral. They’re ‘unsecured’ loans because the lender has nothing to go after if you default. For example, they can’t sell your house like they could with a secured loan. A person obtaining an unsecured loan agrees to pay back the loan within a set term and signs documents attesting to such.
They are also referred to as ‘Signature Loans’ because the bank has literally nothing but your signature. They cannot take possession of your house, car, or other belongings.
But, they can report you to credit reporting companies and can cause you to sit with bad credit. It’s particularly useful for when you’re in need of a cash loan to purchase a car, do home improvements or take an annual family holiday – this type of loan helps for short term financial goals without taking on too much risk.
For people without collateral to pledge, an unsecured loan can be attractive, but be aware that there is more risk to the bank, so interest rates on unsecured loans are typically higher.
So why choose an unsecured loan?
Although unsecured loans are usually more expensive than secured loans, they can be very useful in situations where it’s inconvenient, too costly or impossible to go with secured loans. Lenders will offer unsecured loans to people they think are low risk.
Some of these factors are taken into account before issuing an unsecured loan:
- Does the borrower have a good credit history?
- Has he/she lived at the same address for a long time?
- Is he/she in a secure job?
- Is the applicant an existing customer of a bank?
So what could go wrong with an unsecured loan?
First off, by failing to keep up with the repayments on an unsecured loan, won’t cause you to instantly lose your home.
But at the very least, it will affect your credit rating, limiting your ability to borrow money in the future.
However, you still owe the lender money and they can take steps to reclaim their money back from you. Just like secured loans, make sure you can afford the repayments before you take out an unsecured loan.
If push comes to shove, and you can’t afford to make the repayments, don’t ignore the problem.
Negotiate with the lender for a rescheduling of the loan to a level that will better suit your budget, or temporarily reduce repayments until you are able to start making full repayments again.