What is an Unsecured Loan?

Unsecured loan 

Unsecured loan 

An unsecured loan is a loan obtained without collateral. A person getting an unsecured loan agrees to repay the loan within a set period and sign documents certifying this. This type of loan can also be called a signature loan.

The simplest unsecured loan is a personal loan from a friend or family member with an IOU as a sign of agreement to repay the loan. This kind of unsecured loan should be considered whether you are a lender or a borrower. Large sums not yet paid can be detrimental to relationships with family or friends. Either the lender or the borrower may be dissatisfied with the rate at which the loan is being paid and there is very little use but the small court if the loan is paid.

Another common form of unsecured loan is a purchase made on a credit card. Each time a person makes a credit card purchase, he or she signs a form that allows payment and stands as an agreement to pay borrowed money. Once the person has obtained the credit card, the terms and size of the loan are predetermined.

Use of the card represents agreement to terms the credit card company can set. The money is not borrowed on the basis of security, such as home or property ownership. The credit card company simply has the borrower’s agreement to pay any borrowed funds. If the loan is not paid on time, additional fees may be assessed, the account may be sent to collections, and lawsuits may be taken against the borrower.

Should the borrower not be able to repay the loan due to a significant reduction in economic well-being, claiming bankruptcy can stop the collection. The credit card company cannot, in most cases, require the borrower to sell all assets he or she owns to pay the loan when the bankruptcy has been claimed. However, claiming bankruptcy can seriously damage credit ratings and make banks less willing to offer a person an unsecured loan in the future.

Banks can also offer an unsecured loan to a borrower. Usually, both banks and credit card companies assess the borrower’s creditworthiness before handing out cash without collateral. Those who have lower credit scores tend to have less luck getting an unsecured loan and if they can get one, they can be rated high interest rates as the lender takes more of a risk.

Usually an unsecured loan is for a smaller amount, perhaps for a single time medical fee or a vacation. When a credit is good, shopping around for the best interest rates for an unsecured loan is advisable. Often, the best rates are for an unsecured loan offered through credit unions. If you have an existing account with the Credit Union, obtaining an unsecured loan should not be problematic.

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