An unsecured loan is a loan issued by a lender without any collateral. Unsecured loans are also called unsecured borrowing. The most common form of unsecured lending is credit cards.
Why are lenders offering unsecured loans?
If the loan is secured, the lender’s risk is minimal. One of the safest types of loans for a lender is a mortgage. In case of borrower negligence, the lender can take the apartment purchased by that. Unsecured loans are a big risk for the lender, because if the borrower does not repay the debt, the lender often loses money.
The main reason why banks offer unsecured loans to clients is high competition. The banking industry is a buyer’s market, since if it is necessary to obtain a loan, a person has the right to choose the most favorable terms for him among a variety of options. By making the registration procedure as convenient as possible for the borrower (including eliminating the need to post collateral and attract guarantors), the bank gains a competitive advantage until other market players start to act in the same way.
Features of an unsecured loan issue
The features of an unsecured loan include the following:
- terms are always less favorable than for a secured loan: the repayment period is shorter and the interest is higher.
- unsecured loans require the potential borrower to provide a solvency certificate. Some institutions can lend without such a certificate, but the interest will be so high that such a loan will simply be unprofitable for the borrower.
- the amount of an unsecured loan is limited to a fairly low level – the borrower cannot get much money.
It is impossible to get a loan without US citizenship. At the same time, financial institutions are actively lending to citizens with a temporary residence permit and stateless persons, but only for a period not exceeding the period of validity of the temporary registration (as a rule, several months).
It is also impossible to get an unsecured loan if you have at least a minimal spoiled credit history. If there is information about at least one delay, the bank will refuse. The bank may oblige the borrower to purchase an insurance policy along with an unsecured loan, compensating for the excessive risk with additional income.
Unsecured loan terms
The maximum amount that a borrower can receive without collateral depends on exact lender. The term is limited to a maximum of 3 years. Due to high interest rates, the borrower’s debt may double in 3 years, so he seeks to repay the loan ahead of schedule, which negatively affects his credit rating. Unsecured consumer loans are becoming more and more popular – after filling out an application, the buyer waits for a decision for 20-30 minutes and, if approved, leaves the store with a purchase without paying a single cent.
Benefits for borrowers
The main advantage of an unsecured loan is the speed of processing: it will take a maximum of 3 days to get a decision. A secured loan takes more time, as there is a need to assess the collateral. Another benefit is the ability to use the money at your own discretion, which favorably distinguishes unsecured loans from targeted ones.
The main drawback is high interest rates. The borrower is able to level with the help of a guarantors. The guarantor can be a relative or friend (or several people) who has a fixed income and an unblemished credit history.