You may already be familiar with unsecured loans, but just in case you aren't, you can learn more about unsecured loans here. In short, they are personal loans that don't require collateral. However, they offer less money than secured loans, for a shorter amount of time, with higher repayment rates and higher interest.
There are actually several types of unsecured loans on the market being offered by various lenders right now, so this article is meant to take a closer look at each option and offer more information about them. If you were considering applying for an unsecured personal loan, but were asking yourself "Are unsecured loans worth it?" here are the options that are currently available, so you can decide for yourself.
Payday loans, as the name suggests, are unsecured personal cash loans that one gets until the next time they get paid. Payday loans aren't offered by traditional financial institutions such as banks, but rather by third-party companies. The benefit lies in the ease of access, which is convenient when you need urgent help, but the interest is extremely high, as is the transaction fee, so it may not be cost effective for everyone.
Peer to peer loans
Peer to peer loans are loans one does not take from a company, but from other individuals. Rather untraditional, peer to peer loans work through websites where there is an existing lender base.
If you want to borrow money from someone, you put in a request on the site and lenders decide whether to give you the money or not. From here on out, these types of loans are like others, in that the interest rate is quite high and they are repaid in fixed, regular amounts.
Did you ever think of your credit card as an unsecured loan? Well, it is, because you're taking money from the bank that you don't technically have in order to spend it and repay them later. Like every other type of loan, there is a limit to how much you can "borrow", how much you have to give back and when.
And speaking of credit cards, a cash advance is another type of "covert" loan. A cash advance can be given depending on your credit limit or on your income and they come with a high-interest rate attached, you can check that out on your bill. Similarly to payday loans, a cash advance is normally paid back on payday or on your next bill.
Financial institutions do offer something called a term loan, which is still unsecured, but can be taken out for a certain amount that you agree upon with the lending company. This kind of loan comes with a floating interest rate and a choice of repaying every week, every month, or twice a month, depending on affordability and preference.
Signature loans are a popular option, because they offer a lower interest rate and are offered at banks, which makes them more trustworthy than other more untraditional unsecured loans. While an unsecured loan, it is technically "secured" by your signature, hence the name. What you sign is a document where you commit to repaying the amount. Repayments are made in instalments, but that's also how you get the loan.
Line of credit
A financial institution, such as a bank, can grant you a line of credit, which can act as a secured or unsecured loan, depending on whether you attach a collateral or not. Read more about it, if you're undecided between secured loans or unsecured loans. Your credit is used to decide what your borrowing limit is going to be. Keep in mind that you need an account at that bank in order to be able to get this type of unsecured loan.
Student loans are truly unsecured, because they don't require collateral or credit history usually, so theoretically speaking, they are a risk. The repayment terms and rates, as well as the interest rate is variable, depending largely on the financial institution or organization you borrow from.
With student loans, there is also something known as a grace period, where they allow you a few years to finish your studies before you start paying the loan back. In the UK, repayment starts 2 years after graduation.
Small business loans
Since a small business is either just starting out or just not very profitable, it won't usually have any collateral to offer, hence why it will be offered an unsecured business loan. The catch here is that the borrower needs to be able to demonstrate a good credit history, collateral, as well as experience in business. This kind of loan can also benefit from a flexible repayment term.
Business loans with a personal guarantor
A personal guarantor is something one needs when they cannot demonstrate good, secure financial standing on their own. In this case, it's not for a person, but for a business. While for the small business loans, it was the business that was responsible, here the guarantor is the one liable, should something happen and the business defaults on the loan.
In conclusion, all 10 kinds of unsecured personal loans or unsecured business loans are good options that have valuable benefits to offer, as well as drawbacks. Review each one carefully, research the full details and then make your final decision based on your needs and circumstances, as well as your financial situation.
What do the 10 options have in common?
- They have higher interest than traditional loans
- They do not require collateral
- They usually come from alternative companies
- They have short repayment terms
- They offer comparatively smaller amounts than traditional loans