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What you need to know about unsecured loans

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What you need to know about unsecured loans

unsecured_loanAn unsecured loan is one in which there is no guarantee or ‘security’ for it in the form of collateral or property. This type of loans is risky to the lender as there is no property that they may sell off in case a borrower defaults. However, the options that they may choose so as to get back their money would be garnishing a user’s wages or taking legal actions against them. On the other hand, the borrower may opt for this type of loan as it has lesser risks. This is because they do not pledge any of their property as collateral.

Individuals with bad credit scores are not left out as it is still possible to get unsecured loans. However, it will be a difficult process and they will get terms that are not attractive

Signature loans

This type of unsecured loan is borrowed from an individual’s bank or credit union using a personal loan. The loan is secured by a person’s promise to pay, which is expressed by the signature. The amount borrowed is then paid off in fixed monthly installments until the loan is paid off.

Signature_Loan

Advantages

  • They help the borrower to build their credit score
  • The interest rates are generally low

Disadvantages

  • An individual with bad credit may not get to enjoy lower interest rates.

Student loans

These are unsecured personal loans which are borrowed by students for the purpose of funding their education. A borrower’s credit score is not considered in this case. The loan is awarded to the student for the duration of their studies.

Advantages

  • There is a grace period
  • Low interest rates are charged.
  • The payment options are flexible.

Disadvantages

  • This type of loan is accessible to students only

Credit cards

Unlike other types of unsecured personal loans where you get a lump sum of money, you get access to a pool of money when using credit cards. After a borrower gets approved and has the credit card, they may spend the money and borrow instantly. However, the amount should not exceed the credit limit.

Advantages

  • One may borrow at 0% for a while.
  • The borrower may borrow amounts up to their credit limit.
  • It is possible to charge more money to the credit card if you will need more money.

Disadvantages

  • The interest charged is relatively high.

Peer to peer loans

Peer-2-PeerThese types of unsecured loans are from individual to individual, and not from financial institutions such as banks. Some websites offer a platform on which borrowers and lenders may transact. A borrower places a loan request and lenders then offer funding. The payment of this loan is done in fixed installments over a period of time.

 

 Advantages

  • They have competitive interest rates.
  • A borrower may get loans of high amounts.
  • The loan application process is quick and easy. After the borrower’s loan application is approved, they may expect funds to be sent to them electronically within a short period of time.
  • The borrower saves on interest as the payments can be done without any penalty.

Disadvantages

  • A borrower’s credit standing may take a hit should they send payments late or default on paying the loan.

Conclusion

Unsecured personal loans offer an individual who has good credit to have access to funds. In some instances, the borrower’s promise, expressed in the form of a signature, is the only security that the lender has that the amount will be paid. Individuals who have bad credit may get the attractive terms being offered after they build up their credit. This can be done by getting a small loan and then securing it with cash in the bank. These types of loans offer an individual flexible payment options. Also, the amount that one ends up paying for peer to peer loans may end up being lower than what they would have paid were it a payd