What Is an Unsecured Loan Lender?
In a situation where an individual needs cash for personal reasons, a common option is to seek an unsecured loan. This type of borrowing arrangement is very rare in times when there is a credit crunch, which is a tightening of lending by banks. But if the borrower has an acceptable credit profile, an unsecured lender may offer a loan. Learn everything you can about unsecured lenders before you work with one --- both the good and the bad.
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Unsecured vs. Secured Loan
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Simply put, a secured loan is backed by an item of value that serves as collateral, while an unsecured loan is not. Two of the most common secured loans are home and car loans. An unsecured lender can be a bank that offers and makes this type of loan. Unsecured loans come with an elevated level of risk for the bank, compared with secured loans, since there is no collateral.
Types of Unsecured Lenders
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Business or commercial lenders qualify as unsecured lenders. They sometimes provide funding to business owners without requiring that they hold the rights to a piece of property on a conditional basis. Banks that offer student loans are unsecured lenders. Payday loan lenders will provide money without asking for personal property to back the loan. If a bank approves a standard personal loan, it is also an unsecured loan. Technically, a credit card is an unsecured loan as well.
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Maintain Assets
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An unsecured loan is a particularly beneficial arrangement for a borrower for one key reason. He doesn't have to worry about losing his property in case of a default on the loan, as is the case with a secured loan. However, an unsecured lender can still initiate collections to retrieve overdue loan funds or go to court to get a judgment in case of nonpayment.
High Interest Rates
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Loans from unsecured lenders usually come with much higher interest rates compared with secured loans. For example, an unsecured payday loan company may charge fees that amount to an annual percentage rate of 300 percent or more in some cases. Credit cards and standard personal loans also come with some of the highest rates, compared with secured loans. Unsecured lenders charge higher rates due to the higher risks of making these loans.
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