Definition of Unsecured Loans

Loans make up an enormous portion of the financial industry and the economy in general. A loan provides funds to purchase something that cannot be afforded at the time. It is a contract that promises one party will repay the other party. In nearly all cases, interest is also added to a loan.  There are basically two loan categories: secured and unsecured. In both secured and unsecured loans, money is borrowed and interest is paid.

Secured Loans

In a secured loan, the loan is given with the stipulation that an asset could be siezed and sold if the loan is not paid. The asset is used as collateral for the loan.  requent items used as collateral are houses, land, cars and jewelry.  A common type of secured loan is a mortgage.  If the mortgage is not paid, the house can be repossessed by the bank. The bank can then sell it.

Unsecured Loans

According to Investopedia, an unsecured loan " is issued and supported only by the borrower's creditworthiness, rather than by some sort of collateral."  Unlike a secured loan, an unsecured loan does not require backing by assets.  It is usually based on the credit history of the borrower and the borrower's ability to repay. A common type of unsecured loan is a credit card. Other types of unsecured loans are personal loans, lines of credit and bank overdrafts.

Getting an Unsecured Loan

Getting an unsecured loan can be more difficult than getting a secured loan if the borrower does not have an established or good credit rating.  Although a credit check is not always required, it most often is required to ensure that the borrower has a history of paying off his debt.  Depending on the type of unsecured loan the borrower is looking for, it can be applied for either online or in a financial institution.

Considerations

When applying for an unsecured loan, one should consider all aspects of the debt. Interest rates and other fees should be examined closely and well understood. The following are some questions that should be asked before taking the loan: Can it be paid off easily in the future? What will the total cost of the item be with interest if only the minimum payments can be made?  How long will it take to pay off this debt? How much do I need this item? Sometimes it is better to save for an item than to assume more debt.

Warnings

Beware of predatory lending when apppying for an unsecured loan. While there are many legitimate lenders, there are also those who take advantage of the borrower. These lenders charge large fees or unfair high interest rates. Make sure the lender is reputable and all the terms of the contract are read and understood.

Resources

• Investopedia