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Unsecured loans are credit facilities that are extended to consumers without them providing any collateral for the loan. This means that the borrower does not have to pledge an asset of equal or higher value than the amount they applied for. This asset can be a car, house, or other valuable property. These types of loans are given to customers based on their income, ability to repay, and creditworthiness.
Accessing credit facilities without putting down any form of security is beneficial for a number of reasons. The first reason is that they give the borrower freedom and financial flexibility because the loan can be used for a variety of purposes. The funds can be used to consolidate debts, make home improvements, pay medical bills, and a host of other expenditures.
Secondly, the borrower is not at risk of losing any valuable asset if they default on repayment. This, therefore, makes this option a safer one for the borrower.
Finally, the process of application is quite easy and uncomplicated. In some instances or under some circumstances, a customer can apply for an unsecured personal loan, known as søke forbrukslån uten sikkerhet in Norwegian, and get approval on the same day. But this can never happen with a secured loan because the process is usually more complicated. This simplified application process makes unsecured loans more accessible to a wider range of consumers.
In this article, we will discuss the benefits of these types of credit facilities, how one can assess them, and factors to consider before applying.
Understanding Unsecured Loans
A lot of borrowers who sign off on loan agreements do not fully understand all that it entails. Most often when people are in dire need, all they are thinking of is how to solve that problem. Whatever solution comes at that time is received with relief, only for the consequences to come biting later on.
To save you some heartache and financial woes in the future, we will explain the concept of unsecured loans and the difference between it and the secured options.
Unsecured Loans Explained
These are credit facilities that are not backed by collateral. This means that the borrower is not required to pledge any asset of value to serve as security or a guarantee for the loan. This credit facility is extended based solely on the creditworthiness, income, and financial history of the borrower.
When a lender gets an application for an unsecured loan, they check the credit score and history of the applicant and assess their repayment ability before deciding. Due to the fact that collateral is not required for approval, the lender considers the creditworthiness of the applicant to fix the terms and conditions of the loan.
What Is the Difference Between Secured and Unsecured Loans?
The major difference between these two types of credits is the issue of collateral. Secured loans require collaterals while unsecured ones do not. If you take out a secured loan and you default on payment, the lender can legally seize the asset you pledged as collateral to recover the debt.
With unsecured loans, however, the lender cannot seize any asset because there is no asset pledged by the borrower. The lender, therefore, relies only on the word of the borrower and hopes that they keep their word.
Another difference is the risk factor for the lender and borrower. With secured loans, the risk lies with the borrower because they put down valuable assets which they can lose in the event of a default. With unsecured loans on the other hand, the risk lies with the lender because there is no asset of value to repossess in the event of a default.
Lenders can only mitigate this risk by increasing interest rates and imposing stricter criteria for eligibility. Check out this site for more information: https://www.consumeraffairs.com/.
Factors that Affect Approval of Unsecured Loans
Although we have stated that borrowers are not required to put down any collateral for unsecured loans, lenders have factors that they consider before approving these loans. These factors include but are not limited to the following: –
- Credit Score – The consumers’ creditworthiness is evaluated based on their credit score. A high credit score signifies a solid credit history which in turn gives the consumer a higher chance of approval.
- Stable Income – A consumer with a stable, verifiable income is preferred to one who does not have a verifiable source of income. The proof of a stable income gives the lender confidence that the borrower has the ability to repay.
- Employment Status – Most lenders prefer to approve loans for applicants who have been on a job for a minimum of 3 years. This is because they believe that staying on a job for long shows that the applicant can stay committed to a course.
- Financial History – The lender will review the borrower’s financial history which includes their past loans and payment patterns and check for any payment notes or bankruptcies.
- Loan Amount and Term – The amount that a borrower is asking for also affects whether an application will be approved or not. Some lenders have a maximum limit that they cannot cross with an unsecured loan. Some terms cannot be approved for unsecured loans.
Benefits of Unsecured Loans
From all that we have discussed so far, you can deduce that these types of loans are beneficial to the borrower. Some of these benefits include the following: –
- Flexibility and Freedom of Use – These loans can be used for any personal expenditure that the borrower desires.
- No Collateral is Required – The lack of collateral means that the borrower does not risk losing any valuable asset.
- Application Process is Fast and Uncomplicated – Since one does not need to put down any asset, there is usually less paperwork to be done during the application process for an unsecured loan. This makes the process faster and less complicated.
- Accessible to Many Consumers – Due to the previous points discussed, many consumers have access to this type of loan.
- Helps to Build Credit History– People who have low credit scores, and bad financial history can take out some form of unsecured loan to help them build and improve their records. This can be achieved by making timely payments and fulfilling all financial obligations when due. Read this article for more info on how to build a credit history.
How to Access Unsecured Loans
Accessing unsecured loans requires a little bit of work on the part of the applicant. You should not just wake up and apply to any lender that strikes your fancy. There are factors to consider helping you make the best of this financial product. Below are some of these factors: –
Assess your Finances and Needs
Before you apply for any loan, you need to assess your finances to know where you stand. Determine how much you need and create a budget that will help you see how the loan will affect your finances. Look at your living expenses in relation to your income and any existing debt. This will help you determine how much you should apply for.
Comparison Shopping
Check out as many lenders as possible and compare all their offers. Do not be limited to conventional lenders; look out for every available option. Read as many customer reviews as possible and check out ratings from third-party review sites.
All these will enable you to make an informed decision on whether the option you want to choose is worth your while or not.
Understand the Eligibility Requirements and Application Process
Ensure that you get to know the eligibility requirements and the application process of any lender that you choose. Find out the documents that you need so that you can have them ready before you start your application. Some of the documents you may need include identification, proof of income, and bank statements.
Conclusion
Accessing unsecured loans properly can go a long way in helping you enjoy all the benefits. We have shared some of these benefits and discussed factors that you should consider before applying for a loan. Bear them in mind so that you can make an informed decision when the need arises.
