Unsecured loans are a great way to finance many different types of expenses. You could consolidate your debt, invest in a business venture of your own or even fund your education. But what exactly is an unsecured loan and what different ways are there to get one? Read on and find out.
What Is An Unsecured Loan?
Simply put, it’s a loan that doesn’t require you to offer up any collateral as a guarantee of repayment. Hence, it’s completely different from a secure loan like a mortgage, where you have to offer a property as guarantee to the lender. If you can’t pay back the mortgage, the lender can legally sell that property and collect what is owed to them.
On the other hand, unsecured loans are less risky for the borrower as no property or other valuable belongings are tied up in the contract. That’s not to say that the buyer can’t take any legal action against you. But you definitely won’t lose your home or car by default!
Unsecured loans are more risky for the lender because if you don’t pay up, then they have no collateral to sell and get their money back. That’s why lenders charge a higher interest rate for unsecured loans. However, as long as you have a good credit score, this increment should be very slight. If your score is bad however, you might have to get a co-signer.
What Are The Different Types Of Unsecured Loans?
Unsecured loans can be obtained in a variety of ways. Below are a few popular examples:
This is one of the commonest types of unsecured loan. In order to obtain one, you merely sign a contract whereby you agree to repay the borrowed amount at a specified interest rate. You can get this type of unsecured business loans from one of Australia’s leading providers, banks or credit unions.
Signature loans don’t require you to pay that much interest as long as you have a good credit score. They’re also a great way to actually build up your score.
Who doesn’t have a credit card? Despite the fact that you typically can’t borrow as much as with a personal loan, they’re great for day-to-day use and the occasional shopping spree. Your credit limit is determined by your credit score and there are penalties for skipping payments. However, depending on the card, you get benefits as well, such as cash-back rewards and regular discounts on branded items.
Student loans are a type of unsecured loan because the only major requirement is that you should be accepted into a college. The repayment period doesn’t start until the student is out of college and even then, a further grace period can be negotiated.
Personal Line of Credit
This is when you have a standing line of credit opened with a financial institution from which you can borrow any time you wish. For instance, a lender may approve you for $10,000 in unsecured credit. If you borrow $5000, you’ll only have to start repaying that every month. You can still borrow the remainder any time you wish. The exact amount you can borrow is determined by your credit limit and your past behaviour with the lender.
And that’s pretty much everything you need to know about unsecured loans. They’re great for borrowing money during financial emergencies and if you don’t have any collateral to offer.