By David Treehouse
Unsecured loans are loans that aren’t attached to any collateral. A lot of people like unsecured loans because they don’t have to worry about putting up their homes or cars for collateral. However, if you’re thinking of taking out an unsecured be warned that the interest rates are usually much higher and that in order to obtain one, you’ll have to have a good credit score.
A credit card is essentially an unsecured loan since you’re “borrowing” money from the credit card company to make a purchase with the intention of paying them back at a later date.
Payday loans have recently become a popular type of unsecured loan as well. They can be found both offline and online. A payday loan is a loan from a non-financial business where borrowers obtain enough money to cover their expenses until they receive their next paycheck. Payday loans are convenient, but they usually come with a high transaction fee and incredibly high interest rates. Some businesses have charged as much as 400% for interest! These companies also require a much quicker repayment plan. An example of a payday loan site would be a site like fridayfriday.com, although there are plenty of others out there.
Line of Credit
A line of credit is an unsecured loan offered from a financial institution. While a line of credit can be a secured loan if you have collateral you want to use against it, it is often used as an unsecured loan. Approved customers have a cap on the amount they can borrow (which is determined by their credit) and will only be charged interest on the total amount borrowed. You generally have to have an account at the financial institution you’re using for the loan.
If you own a credit card, you’ve probably seen the line on your monthly bill about the interest rate for a cash advance. Ever notice how much higher it is than your normal interest rate? Cash advances come in two forms: advances based on your income or advances based on your credit limit. As with most unsecured loans, cash advances have a higher interest rate and require a faster turnaround time for repayment. Most cash advances are expected to be paid back on your next payday or during your next credit card billing cycle.
Signature loans are so named because the only thing securing the loan is your signature, or in other terms, your promise that you’ll repay the person or business lending you money. Signature loans are often available at banks and credit unions and are awarded in installments. The borrower usually repays the loan with set monthly payments until the total amount has been repair. Signature loans tend to have a lower interest rate than many other forms of unsecured loans, making them an attractive option for first time borrowers.
Student loans also fall under the unsecured loan category. Many college students choose to take out student loans to help pay for the rising tuition costs. Depending what organization you borrow through, interest rates, repayment plans, and grace periods can vary. However, most student loans don’t require previous credit history for the borrower.
Peer to Peer Loans
Peer to peer loans are a very unsecure way of borrowing money as the borrower and lender have to rely on individual people rather than businesses. Websites such as Lending Club or Prosper allow the borrower to post a loan request on the website where potential lenders can choose whether or not to grant them the money. Like other unsecured loans, peer to peer loans are also provided in fixed rate installments and come with a high interest rate.
Small Business Loans
Small businesses usually have very few assets or collateral to use when applying for a loan. Many financial institutions or loan companies will offer unsecured loans for small businesses. These are usually granted for borrowers who have a great credit score or financial history. Depending on who you borrow from, the repayment terms can be flexible, though be aware that a lot of companies are wary about granting unsecured small business loans in the event that the business folds. These loans are granted with the understanding that the business is responsible for paying back the loan.
Business Loan with a Personal Guarantee
Some lenders will grant business loans with a personal guarantee, and while these loans are similar to general business loans, the individual is the responsible party instead of the business. The business is the official borrower, but if something happens – such as the business not making enough money or the business having to be closed – an individual is then responsible for paying back the lender.
Term loans are offered by financial institutions for a specific amount that is agreed upon by the lender and borrower. This amount has a very specific repayment schedule and can be paid out in month to month, bimonthly, or biweekly installments. They also have a floating interest rate.