Sunday, May 4, 2014

Seven Considerations Surrounding Unsecured Loans

Unsecured loans are made on the sole assumption that the signer for such a loan has agreed to repay the lender without offering any real property to back it up. Should the borrower default, the lender has no recourse other than resort to the legal system to seek remuneration. There is no real or valuable property offered (security) that the lender could legally confiscate in order to seek repayment. Requiring nothing more than the signature of the borrower, they are often referred to as signature loans.

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Seven areas should be thoughtfully considered before opting for an unsecured loan.

One - The I Owe You Loan

The easiest and simplest form of an unsecured loan is the time-worn IOU. A borrower gets some cash from a friend or family member and promises to repay. Though simple, these should treated with kid gloves. If the borrower cannot repay, there will not only be a bad debt, there could also be some bad blood and relationships destroyed.

Two - The Credit Card Purchase or Cash Advance

Credit cards have become the cash source of choice for many. Consumers spend billions on their credit cards each year. People do not really regard this activity as borrowing and lending but that is essentially what it is. The credit card company pays the merchant and you pay the the credit card company. Some credit card companies have taken great liberties regarding interest rates for the slightest infraction on the part of the customer. And terms for a credit card cash advance can be as imposing as a loan shark's.

Three - Loans from Brick-and-Mortar Lenders

Banks and credit unions may still offer signature loans. But most now offer what they call personal lines of credit. The credit limit and the interest rates are set according to the underwriting terms of the lender, along with your credit scores or other indicators of credit worthiness. Of course, the better your credit score, the more favorable terms these loans will have.

Four - Soaring Rates of Interest

Lenders often claim that since no collateral is being offered, there is a much larger risk and that higher interest rates are thus justified. Some borrowers do not really see this since the loans they procure are often low-value, usually less than $1,000. A loan of $250 could require a pay back of $284 after two weeks. Thirty-four dollars seems a pittance, but that is a big lump in the wallet of a lender.

Five - Bankruptcy Can Eliminate Unsecured Loan Obligations

If a borrower files for bankruptcy, chances are that the unpaid unsecured loans will be totally evaporated since these lenders have the fewest rights to assets. Other loans, such as secured loans, are treated differently.

Six - The FDCPA Protects Borrowers from Avid Collectors

The Fair Debt Collection Practices Act offers consumers some protection from collection agencies should a loan, even credit cards, go into default. No harassing calls, no calls at work, nor threatening law suits when they have no intention to do so, are allowable. There are other provisions for consumers to sue, even with allowances for attorney fees.

Seven - Check Your FICO before Application

When a consumer applies for an unsecured loan, lenders do want to see your credit report. The FICO (an acronym for a credit industry company) credit score will be considered. The better FICO one has the better to negotiate a better interest rate. Federal laws allow consumers access to this score. It should be provided and examined before making any loan applications, as the report can contain errors.

Of course, people have relied on unsecured loans for generations. Understanding the terms and conditions before signing on the dotted line is imperative. Also, lenders should be checked carefully because there are scofflaws in any industry - especially those dealing with other people's money.

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