Unsecured Loans | Definition, Risks, Benefits and More

Learn what are unsecured loans and of their risks to banks and about the benefits and disadvantages to the borrower.



What are unsecured loans?

This type of loan is a zero collateral one that is approved only on a borrower’s credit worthiness. Security is not needed to get such a loan. The borrower must have high credit ratings to qualify. These are offered by most banks. If your credit history is not perfect, there is a high chance that no lender will be willing to give you such a loan.

The risks to the lender

Because an unsecured loan is not backed by any type of property, they are a bigger risk to lenders. That is why they usually have a higher interest rate when compared to secured loans. The lender does not have anything to hold on to in case the borrower fails to repay the agreed amount.

The benefits to borrowers

Unsecured loans are good for people who do not have property that can be used as collateral. It is also ideal when you don’t have adequate equity in your home to be approved for home owner’s equity loan. It is much easier to obtain an unsecured loan than a secured loan if you meet the income and credit requirements. The amount of money that you can be given when you apply for an this type of credit depends on the size of your business and your credit rating.

Another key advantage is the fact that your property will not be seized if you default on repayment. The lender can only seize your property when he has obtained a court order. In addition, if you file for bankruptcy, the court can discharge your loan. This is not possible when you take a secured loan.

Disadvantages

If you have a poor or nonexistent credit history, it will be almost impossible for you to obtain an unsecured loan. These loans also have higher interest rates than secured loans.