Unsecured loans are a type of loan you can get from a bank, or any other type of money lender. They’re a reasonably common type of loan, but not a lot of people fully understand how they work.
In this guide, we’re going to give you an introduction to unsecured loans, what they are, and what you should beware of.
The Basic Idea
We’ll begin with the basic principle of an unsecured loan. A loan that’s secured has some sort of property as collateral. The most common type of secured loan is a house, such as in the case of a mortgage.
Unsecured loans are a loan where you don’t have to put anything forward. It sounds like the best possible loan, which is true in many cases, but there are some drawbacks.
Lower Amounts
An unsecured loan may work in the same way as any other loan, but the catch is you will nearly always have to put up with borrowing smaller amounts. No bank is going to lend you a large amount of money if it isn’t secured against anything.
Credit Score
In the world of financial lending, the credit score is essential. If you don’t have a good enough credit score, you’ll struggle to get an unsecured loan.
What you have to understand is that an unsecured loan is a risk for any lender. If you go bankrupt and you’re unable to pay, they have no way of claiming back that money. On the other hand, if you owned your own home they could sell the home and use the proceeds to pay back the loan.
The most common type of unsecured loan is a credit card loan. You use your credit card at the store and you pay it back later. That’s a loan.
You need a better credit score to get better rates and higher limits. That’s because in the financial world a good credit score is seen as a sign that you can be trusted. You’re likely to pay the money back.
Is there a Risk?
You may think that just because you have an unsecured loan means that you can afford to not pay the money back and nothing bad will happen. This isn’t true because your credit score is still influenced by your conduct.
If you miss a payment on an unsecured loan, you’ll lose a chunk of your credit score, and this will make it harder for you to get another unsecured loan in the future.
In the event you can’t pay at all, an unsecured loan can still lead to bankruptcy and destitution. While unsecured loans are obviously less of a risk for you, they can still cause significant problems if you fail to pay that loan back.
Always conduct a thorough assessment of your financial position prior to taking any unsecured loan. If you don’t know much about finance, we recommend approaching a financial investor first. They will be able to show you your financial position and provide some recommendations on whether this is a good option or not.
