An unsecured loan is one which doesn’t need to have collateral to assure the payment of it. This is issued and supported only by the borrower’s creditworthiness. Those who are approved or qualified to get this loan usually have high credit score. That means their credit background should be really satisfactory as that is the only guarantee that the amount will be paid back.
Unlike secured loans, unsecured loans involve high risk for the lender as there is no pledge of an asset or any valuable. So, naturally the interest rate will be comparatively higher.
For whom an Unsecured loan is the best option for those who do not have any asset or valuables to mortgage or pledge to get a loan. But they should have a clean credit history or high credit score in that case to get this loan.
This type of loan is also known as personal loan. It is mainly for smaller amount. And it is used for small purchases such as equipment or furniture. The lender doesn’t demand any collateral but just relies on the borrower’s promise to pay it back.
Types of unsecured loans
There are different examples for unsecured loans such as:
- Loan offered by the shops: When you purchase equipments such as TV or refrigerator the shop itself offers you a loan where you will be able to pay the amount in installments. You need to pay only a part of the total cost as the ground payment and the rest can be paid as monthly installments.
- Education Loan: Students get loan from governments as well as universities. Even banks and other financers also offer education loan. Here the students do not have to pledge any asset. They get the loan on the guarantee of pay back on getting a job.
- Personal Loan: There are many other examples of unsecured loan. You get unsecured loan on purchase of vehicle, on renovation, etc.
- Credit card: Credit card also offers you money without any collateral.
- Peer to peer loan: This is also an example of unsecured loan where individual investors on the website lend you money.
But the most important thing of all is that you need to qualify to get this loan for which you should have a good credit score.