What are Unsecured Loans

3 Minutes Read

Loans are in two categories, those that are secured and those that are unsecured. The simplest way to define an unsecured loan is that it is the type of loan that does not require any form of collateral. In other words, for the debtor to receive a loan, he or she does not have to put up his property as collateral. An unsecured loan is usually given solely on the credit worthiness of the debtor, as opposed to having collateral. Unsecured loans are also sometimes referred to as personal loans or signature loans. Notable about unsecured loans is that they can be acquired by anybody, even those that do not own any kind of property.

As has been stated, for a debtor to get an unsecured loan, he or she has to be credit worthy. In other words, he or she needs to have good credit standing. Since the loan does not require any form of collateral, it is really a big risk on the part of the creditor, since he has no fall back in case of nonpayment. With most loans, if the debtor fails to repay the loan money, the creditor could always sale the collateral. However, with the unsecured loan, there is no collateral, thus, placing that much more risk on the creditor. Because of all the increased risk, unsecured loans usually attract a higher interest rate as compared to secured loans. The only comfort that the creditor gets is through the high interest, since this could be the only way of getting some of his money back in case of nonpayment of the loan money. However, despite the high interest rate, the interest on unsecured loans is usually not tax deductible.

Overall, if you do not have enough equity in your home, or cannot ordinarily qualify for a home equity loan, an unsecured loan could be the best option. Additionally, if you do not have any property to put up as collateral for a loan, an unsecured loan could be the way to go. However, before deciding to get this kind of loan, it is vital that you try to get as much information as you can about it.