An unsecured loan is one that is approved based on the borrower’s credit score. It is also known as a personal loan and you don’t need assets, collateral or property to apply for one. If you have a low credit score, there is a high chance that your application will be rejected, or it will be subject to a high interest rate.
How Does an Unsecured Loan Work?
An unsecured loan is a risk to the lender because they have nothing to fall back on if you fail to pay. This is why approval is based on the borrower’s credit score, a high credit score is an indication that you know how to manage your finances and you are less likely to default on your payments. A low credit score is a red flag to lenders, and they are less likely to offer you the money that you need. However, in some instances, the financial institution will approve the loan if you can provide a guarantor with good credit to sign on your behalf. This means that if you are unable to pay, the responsibility falls on the cosigner.
How Are These Loans Available?
These loans are available in the form of credit cards, personal loans and student loans. They are either term loans or revolving loans:
•A Term Loan: The borrower is given a certain amount of time in which to repay the loan. They must make repayments in equal installments during the provided term.
•A Revolving Loan: A typical example of a revolving loan is a credit card, it means that a certain amount of money is made available to you, once you have repaid the money, you can spend it again. The majority of credit card lenders will increase your line of credit if you can prove that you are a trustworthy borrower.