Unsecured Loan

What is an Unsecured Loan?

An unsecured loan is a loan that doesn’t require the borrower to put up an asset as collateral. Instead of using collateral, the borrower’s credit history and income are examined to determine loan eligibility. 

With an unsecured loan, the lender cannot take assets away from the borrower if the borrower fails to repay the loan.

How Do Unsecured Loans Work?

Unsecured loans generally require the borrower to have a higher credit score to qualify for them when compared to a secured loan. As a borrower, you may be required to submit proof of income in the form of pay stubs or bank statements.

Your credit history determines the terms of an unsecured loan, and those with an excellent credit score will generally see lower interest rates and better terms than someone with a lower credit score.

Improving your credit score will help you find better loans in general.

If you stop paying your unsecured loan, your loan goes into default. From there, the lender must decide if they will take the loss or pursue getting the money back in some other way. This could include taking you to court and garnishing your wages, but unless there is a court judgment, your assets are safe.

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What Are Different Types of Unsecured Loans

Unsecured loans include:

  • Personal loans
  • Student loans
  • Most credit cards

These loans are either revolving loans or term loans. 

A revolving loan is when you are free to spend and repay up until your credit limit as often as you’d like. This is typical of credit cards.

A term loan is when you’re lent a lump sum of money and repay it in monthly installlments. Personal loans are typically term loans.

Personal loans are loans that generally come with minimal or no restrictions on how you can use the money. This makes personal loans helpful for financial emergencies or to fund an upcoming expense, such as going on a vacation.

Student loans, on the other hand, are used to help fund higher education.

Credit cards are typically used for day-to-day spending and covering expenses not covered by one’s money in their checking or savings account, for example.

Differences Between a Secured Loan and an Unsecured Loan

The main difference between an unsecured loan and a secured loan is that an unsecured loan isn’t secured by collateral whereas a secured loan is.

Unsecured loans often come with higher interest rates as they are riskier to lenders.

A mortgage is an example of a secured loan as your house is collateral on a mortgage. A credit card is an example of an unsecured loan as if you default on your credit card, the credit card company can’t repossess your assets and must seek legal action to attempt to get their money back.

Pros of Unsecured Loans

Some of the key reasons to get an unsecured loan include:

  • No collateral required
  • Decreased risk for the borrower
  • Fast access to funds

Unsecured loans also offer competitive interest rates to those with excellent credit.

Cons of Unsecured Loans

Disadvantrages of unsecred loans include:

  • Typically higher interest rates than secured loans
  • Harder to get approved with lower credit scores

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What Are Reasons to Get an Unsecured Loan?

If you need a loan but don’t to pledge collateral, then an unsecured loan may be right for you. Here are some reasons why you might want to get an unsecured loan:

  • Cover an emergency: If an unexpected expense comes up that you can’t afford and you don’t want to swipe your credit card, then an unsecured personal loan could be a potential option to pay for the emergency.
  • Pay for a large purchase or vacation: If you’re about to buy something, such as a new appliance for your house, or go on vacation, an unsecured loan could help you get funds quickly.
  • Consolidate debt: High interest credit cards can harm your financial situation. Using a lower interest personal loan can be good solution to consolidate high interest debt into a single lower interest fixed monthly payment.

Need an unsecured loan? Upstart is one company that offers personal loans. Get your rate in minutes without impacting your credit score.

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