There are many different unsecured loans types available to you when you need to borrow money, but they are not always easy to obtain and they generally have a much higher rate of interest than a secured loan where your property is used as collateral.
Credit Cards as Unsecured Loans
Probably the most common type of unsecured loan is the credit card. A credit card is a continuous line of credit that allows you to make purchases and obtain cash advances. Ideally you should pay off what you owe on your credit card each month but many people only pay a percentage of what they owe. Each time you make a purchase or draw a cash advance and don’t pay it all off at the end of the month you reduce your line of credit. A good number of people have more than one credit card but this can cause problems as you can end up paying more in interest charges and administrative fees.
Bank or Personal Loans
It is possible to get a bank loan for a specific purpose that does not require you to secure it against your property. Although this more tradistional type of unsecured loan has a higher rate of interest than a secured loan, the interest rate is usually a lot lower than that applied to a credit card.
An unsecured bank loan is a closed ended loan in that you borrow a specific amount of money that you have to pay back; once you have repaid the loan you have to apply for another if you need more money.
An unsecured loan is not backed by anything such as a house or car but is lent based upon your personal financial circumstances and on trust. There are also unsecured business loans where the business, rather than the individual is responsible for the repayment of the loan.
The Advantages of Unsecured Loans
The greatest benefit of an unsecured loan is that if for any reason you are unable to repay what you owe then the lenders cannot take your car or foreclose on your home because the money was lent without any collateral. It is harder for the lender to recoup their money if you default on an unsecured loan and so these loans are harder to get and have different criteria to a secured loan.
One of the ways in which an unsecured loan benefits the borrower is that you can take out a small personal loan to help with your credit history, which will make it easier to get a larger loan later on. Unsecured loan amounts are more often smaller than secured loans and this means they take less time to pay off.
The Disadvantages of Unsecured Loans
Some of the disadvantages of an unsecured loan are that it may be harder to get if you have no significant credit history. The interest rate on unsecured loans can be a lot higher than on a secured loan and you get less time in which to repay the loan.