Unsecured Loans

All about unsecured personal loans

Unsecured loans do not require the borrower to offer collateral to the lender. Instead, the borrower is approved or disapproved for the loan based on his or her credit history, income level and job security. Generally, unsecured personal loans are for small amounts of money that can be repaid quickly.

Types of Unsecured Loans

Broadly speaking, there are two types of unsecured loans: unsecured personal loans, and unsecured business loans. With unsecured personal loans, you assume full responsibility for the debt yourself.

Unsecured business loans work a little differently, though. These loans may or may not require the borrower to make a personal guarantee. In either case, the business is considered the borrower/debtor. If no personal guarantee is required, the business itself is responsible for paying back the loan. However, an unsecured business loan with a personal guarantee holds the person making the guarantee fully responsible, even though the business is technically considered the borrower.

Lenders' Criteria for Granting Unsecured Loans

When assessing your unsecured loan application, the lending institution will rely primarily upon your credit history and current debt-to-credit ratio. In other words, the bank will look at your current credit limit and consider how much of that credit is currently tapped. The bank wants to make sure you're not taking on more debt than you can handle at your current income level; thus, banks tend to favor borrowers with a low debt-to-credit ratio.

Unsecured bad credit loans are available if your credit history isn't that strong, but be aware that you'll face stricter borrowing limits and the interest rates on these loans are significantly higher. This reflects the fact that you're a riskier proposition for the bank, given your past history with debt.

If you have a regular job but weak credit, fast unsecured loans for small sums of money are available through payday loan companies. These businesses offer same-day unsecured loans to customers, but they often charge exorbitant interest rates because the money is expected to be repaid quickly. You should only use this option if you absolutely must, as it's a slippery slope to a heavy debt load if you get behind on your repayment plan. You should also expect fairly low and strict borrowing limits.

In addition to these options, look for online lenders. It's easy to compare terms and interest rates when shopping for a loan online, and you can quickly separate poor offers from good ones.

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