Characteristics of Unsecured Loans
To distinguish unsecured from secured loans, you can use the following characteristics as reference.
Absence of Collateral
Unsecured loans is a type of debt that is characterized by the lack of collateral requirement. Collateral acts as something that you will put on the line for your lender’s security. If you are suddenly unable to pay for your debt, they have the authority to take the collateral from you. Usually, this is something of value to you – like a your home for instance.
High Interest Rates
In an unsecured loan, lenders basically have nothing to hold against you if you are unable to pay for your debt. If you refuse to pay them, the only way they can force you is to go to court. This means a higher risk loan that the lenders counteract by imposing high interest rates or strict requirements prior to approval.
No Tax Benefits
Another characteristic of this loan type is the lack of tax benefits. In a secure type of loan, you can deduct the interest rate from your income tax. With an unsecured loan, the interest accrued is not tax deductible.
Lower Loan Amount
This type of loan usually involves a smaller amount of money as compared to secured loans. Unexpected expenses like medical bills or funeral costs are typical reasons to get this type of loan – both of which require a small amount only. If you need a bigger amount, like hundreds of thousands, you need to apply for a different type of loan.
Short Payment Term
Because of the small loan amount, the payment term is relatively short as well. And speaking of the method of payment, unsecured debts may or may not be given fixed terms. This depends on the specific loan purpose and the agreed terms with the lender. For instance, if a loan is given a specific payment term like a signature loan, it is considered a fixed term or non-revolving debt. On the other hand, credit card debt, which is another form of unsecured loan is a revolving debt because the monthly payments and interest rate is variable and can change month on month.
Who Gets Unsecured Loans
Unsecured loans are perfect for people who does not have equity to put on the line. It is a great option for people who have a good credit standing. By having a high credit score, you can negotiate the interest rate of your loan. You also have the opportunity of being approved for a bank loan.
This does not mean that people with bad credit will not be approved of this loan. There are lenders who will agree to provide you with financial assistance but there are repercussions. For one, the interest rate is usually higher than those who have a good credit standing. Also, you may find that your choices of lenders will be limited. Not all financial institutions (esp. banks) will lend money to a person with a bad credit score.
Borrowers who are in need of fast cash are also ideal candidates for this type of loan – especially if you are getting a payday loan or using your credit card to pay off purchases.
Tips When Getting Unsecured Loans
Before you finalize your intention to get unsecured loans, or any loan for that matter, you need to check your budget first. Analyze your income and deduct any current expense that you have. These expenses include your basic necessities, utility bills and other payments for current debts. Anything that is left is the amount that you can afford to pay the new loan that you want to take. If this comes out to be a negative amount, think twice before you proceed with the loan. You run the risk of defaulting on the new loan.
If you are getting a loan because of an immediate need, see how you can save on your current expenses first. Check the expenses that you can live without and consider if you have anything of value to put up as collateral.
Bottom line is, if your income is not enough to cover your current expenses, getting another loan to pay for that emergency need may not be approved.
If you can no longer cope with all your debts, give us a call. National Debt Relief is a debt relief company catering to the needs of debt ridden Americans. Call us through our toll free number or chat with us through our live chat support. You can also fill out the short form on this page and we will have someone get in touch with you as soon as possible.
