Everything you should know about unsecured loans
When you borrow money, there has to be some level of reassurance on your lender's part that you will pay the money back. With an unsecured loan, the promise of paying this back is with a signature only. If you're considering applying for an unsecured loan, read on to learn everything you need to know before taking your next step.
What is an unsecured loan?
An unsecured loan is a loan that is approved without being connected to a piece of collateral - meaning something of value, like a business asset, a home, or a car. Unsecured loans don't pose the risk of losing your property if you fail to pay them off on time.
What are some examples of unsecured loans?
The most common unsecured loans are credit cards, which allow you to make purchases on credit, student loans, which cover the fees of further education, and personal loans, available from banks and other lenders.
Short term loans, such as payday loans, are an example of personal unsecured loans. These do not require you to connect your loan to an item of value if you don't pay it back - although that does not mean that you will get away with breaking the terms of your deal.
How do I get approval for an unsecured loan?
Before approving your application for an unsecured loan, lenders will consider a number of factors:
- Your credit score: If you have ever borrowed in the past, lenders will take a look at your history and determine whether you are trustworthy or not by checking that you have repayed all debts in time. The higher your credit score, the more likely you'll be approved for an unsecured loan, and the lower the interest you will be able to negotiate.
- Your income: First and foremost, you will usually always need to be in some form of employment to be approved for an unsecured loan. If you can't prove that you have some sort of steady income, you will find it far more difficult to be able to convince a lender that you can still repay your loan on time. A lender will look at your monthly income and decide whether you can realistically pay the loan off based on what you earn.
What happens if I can't repay an unsecured loan?
If you can't pay back your unsecured loan on time, it is possible that your lender may take legal action against you to recoup the money that you owe. Your loan terms may also give your lender access to your bank account should you default, which means they could take the money from your account anyway, providing you have it.
Failing to repay an unsecured loan on time will also affect your credit score. When your credit score drops, it will make it more difficult to take out future loans, which may become an issue when you're purchasing a car or a property.