A non secured loan is simply a loan given without collateral. In most situations, lending institutions like to protect themselves from a default. They usually do this by laying claim to some item of property that is roughly equivalent to the amount of money they are lending. If you don’t pay, they take possession of your item, and theoretically they lose very little, or sometimes even gain, if the item has gone up in value or was worth more than the value of the loan. In the case of an unsecured loan, the lender is taking a much bigger risk. He will be relying on your past credit history, and making a bet that you are the type of person who will pay up. To make up for all this risk, the lender will usually charge a much higher interest rate. Sometimes a co-signer may be required if you’re credit history isn’t impressive enough.
The length of non secured loans is usually 1 or 2 years, unlike secured loans, which are set based on the kind of item you put up as collateral. For example a house retains it’s value longer than a car, so the loans with cars as collateral have to be paid off sooner. With an unsecured loan, the lender isn’t willing to risk his money for very long. He wants to see a return very quickly. Because of the shorter length of borrowing, the payments for a unsecured loan tend to be much higher in relation to the size of the loan than the payments on a secured loan, but the loans are usually fairly small compared to the gargantuan size of some secured loans.
Non secured personal loans are much more difficult to get. You’re credit history should be extensive and of a very high quality, to even be considered for an unsecured loan. Rejections are very common and even if you do manage to get a loan, a poor credit history will make the interest rate extremely high. The actual interest rate varies a lot, but in general, you can expect to pay double or even triple the interest rate of someone with collateral on the same size loan.
You would think that those sort of interest rates would make non secured loans almost unheard of, but because of the current economic climate, unsecured loans are becoming much more popular among borrowers. With housing prices falling, people are finding that the risk of losing your home is very real and unsecured loans have definite advantages. Even with the interest rates. People would often rather pay more on the loan, and know that their house isn’t at risk.
Unsecured loans are sometimes used in emergency situations, to help people deal with a financial crisis of some sort, or pay expensive medical bills. You can usually get the money from an unsecured loan very quickly (often as fast as 2 days), and there are no restrictions on how that money is used. Some people with very good credit use unsecured loans for impulse purchase luxury items, like expensive cars, or high tech toys.
If a borrower is interested in having access to unsecured loans, but doesn’t have enough credit to be considered for one, there are some solutions. As mentioned previously, you could have a friend or relative with a better credit history co-sign on the loan with you, or you could take out some secured loans and pay them off promptly as a way to improve your credit.
Whether or not to pursue an unsecured loan is a pretty straightforward decision. In most cases, loans with collateral are a better option for the borrower from a financial perspective, but unsecured loans have their place, and sometimes they’re the only viable option.
Tags: non secure loan, non secure loans, non secured loan, non secured loans, non secured personal loans