Unsecured Loans

Instead of being backed by an object of value – collateral – unsecured loans are issued according to the person’s credit rating. This means that they are more difficult for a borrower to obtain than a secured loan, as the lender has to rely on the person’s credit history to determine whether to take them on as a client. If you have a particularly poor credit history, the lender will view you as a bigger risk and might not lend you the money.

An advantage about this type of loan is that the bank or financial institution lending you money can’t repossess your assets, if you are unable repay the outstanding amount. However, this doesn’t mean that they can’t hold you liable in other ways: the lender has the prerogative to take legal action against you if you default on your payments.

The three most common unsecured loan plans are bank overdrafts, credit cards and personal loans. Depending on the type of payment plan you choose, the repayment period can range anywhere in the region of 6 months to 10 years. Also be aware that unsecured loans have different terms and conditions depending on the lender, so it is worthwhile to shop around. It is important to familiarize yourself with these three unsecured loans before attempting to set your finances straight.

• Bank Overdrafts

These are only obtainable via prior arrangement with the lending institution or bank, and you will not be considered if your bank account isn’t in an acceptable state. A bank overdraft effectively entails a withdrawal that exceeds the balance currently in the client’s account. This scenario immediately places you in the red, as you are indebted to the respective creditor.

For somebody who isn’t in a very stable financial position, this is a handy option as you only pay interest on the amounts borrowed. Overdrafts include a higher interest rate though, given the absence of collateral. Thus, they can take years to pay off which won’t help solve your already bad credit record. The lender could also request the repayments sooner than you expected, which can also wreak havoc with your finances.

• Credit Cards

A credit card system involves the bank or creditor issuing you with a line of revolving credit that takes the physical form of a card. Each time you make a credit card purchase, you give authorization that you agree to pay back that amount of money along with the additional interest.

Even though there is a clear convenience factor involved because credit cards can be used worldwide and are safe to use, they are a temptation for people who are already prone to overspending. Due to the fact that money isn’t deducted from your account you are in danger of running up exorbitant outstanding bills. If you fail to pay back the loan amount in the appointed time, you could be charged additional fees and possibly face serious legal proceedings.

• Personal Loans

An unsecured personal loan is a good idea for a person who prefers not to use their home or another valuable asset as collateral against the loan, and can be a lifesaver when you urgently require cash – for a wedding, unplanned vacation, or to settle medical expenses for example. Keep in mind that it helps to have a first-class credit rating when trying to get your loan approved.

Again, as with general unsecured lending schemes, the funds provided to you will come with a relatively high interest rate – however, varying rates are available if you look in the right place. This also means that the amount lent will be significantly reduced compared to the size of the loan you would get in a secured case. Nonetheless the repayment period makes it manageable, as this can extend up to 10 years.

Your monthly payments will be calculated according to your earnings and financial standing, so it won’t be something you can’t afford. It is ideal for individuals that are starting out, such as a non homeowner paying rent or a student who doesn’t have a stable income. Another bonus is that these loans are generally issued with immediate effect and don’t involve endless documentation in order to get approved.