What Is An Unsecured Loan

There are many instances when an unsecured loan is equated with a personal loan. To be more accurate about it, an unsecured loan is one general type of personal loan (which can also include secured loans). Unsecured loans are made by the lender in the absence of any offer of collateral from you. From the point of view of the lender, there is no security, no immediate source of repayment money, for the loan in the event that you default. This is the reason the loan is called unsecured.

Since the unsecured loan is also a personal loan, you can use the money from an unsecured loan for any personal purpose you may have. You could go on holiday with it, or buy a new car; you could use it to finance home improvement projects or to consolidate your unsecured debts. You could even use it to purchase a home, and the loan would not appear as a lien against the property.

There are appropriate and inappropriate uses of an unsecured loan. It is not normally suitable to use unsecured loans to finance real estate purchases, because the loan would need to be paid back within a relatively short term whilst the payback on the real estate project can be realised only after a much longer time. You would thus be in a cash bind if you do that.

The lender will not mind much how you use the money. But the lender does want some assurance that you will pay it back. The lender, therefore, will look at your income from employment and other sources, as an indication of your capability to pay, and your credit report, as an indication of your reliability and responsibility in managing your obligations to creditors. As much as possible, the lender will want their unsecured loan borrowers to have outstanding income, savings, and credit. You can thus expect a thorough background check from potential lenders when you apply for an unsecured loan.

To further reduce the risks of the unsecured loan, the lender will do a few things. First, the interest rate for an unsecured loan will be on the high side. You will have to pay more (in interest) for the loan, which serves to protect the lender's profit. Secondly, the lender will limit the amount of the loan that you can borrow, which serves to limit the lender's capital exposure. Third, the lender will set a shorter time period for repayment, which limits the time that the capital is exposed. Thus, an unsecured loan normally has relatively high interest rate (usually fixed rate), small amounts (up to around £15,000), and short terms (generally, up to 5 years although there are exceptions).

Because there are fewer things to evaluate about the unsecured loan, it can be processed in less time. Some financial institutions can make the funds available within a day or two after the lender accepts the loan. So if you need to have the money quickly (but not instantly), an unsecured loan is a good option to take.

Although you have not offered any collateral for the unsecured loan, you should still be careful about repayment. Lenders do have recourse to the courts if you default on the loan. Although the process may take some time and be costly, the court can order your assets to be repossessed and sold to repay the unsecured loan. In such a case, you would then have additional costs to bear: the costs of the lawsuit, which can be expensive.

You would not want that. So if you have an unsecured loan (or any loan, for that matter), you must make repayments religiously. If you anticipate or are experiencing any problems, try to work out suitable arrangements with your creditors immediately.