Sunday, May 18, 2014

Unsecured Loans and the Facts to Keep in Mind

The economic realities of life today have many people seeking loans just to relieve the financial pressure they are under. There is certainly nothing wrong with this, since loans provide immediate funds that can be repaid over time. But often unsecured loans are the only option, as opposed to secure loans.

It might seem that there is little difference between loans that are unsecured and secured when it comes to getting an application approved or rejected. The truth is that security can have a real influence over the decision by the lender, not only in approving it but in the sum granted in the loan.

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In approving a loan without security, the lender leaves themselves more exposed than if they approved one with some form of collateral. This affects confidence which, in turn, affects interest rates and the sum that the lender is willing to lend.

Availability of Loans

That is not to say that it is impossible to get an unsecured loan that is competitive in its terms. It is true that secured loans are certainly more easily approved by the traditional lending institutions. But this is simply due to the inclusion of collateral, and the fact that the investment made by the lender is protected should the borrower default on their payments.

However, with loans that are unsecured, there is a stricter criteria applied to applications, especially when it comes to credit history and income. This is because they are the only factors to indicate the likelihood of a problem free payment schedule and, therefore, the only way to know if granting a loan without security might prove to be a costly mistake.

The Internet Option

With the internet now a central part of everyday financial and consumer business, there is a vast variety of lenders that can be approached for unsecured loans. These lenders focus their approval criteria on income and the ability to receive monthly repayments through an automatic payment scheme with your bank.

Collateral is less significant, partly because they are not a physical institution and claiming the item is more troublesome, and partly because their niche market is those who are likely to be rejected by the traditional lenders.

Most of their business then is issuing loans that are unsecured, and they are understandably more open to accommodating applicants with low credit scores. And while loans without security may have higher interest, they can also be approved within 24 hours.

The Loan Terms

It does not matter if your application is for an unsecured loan or secured loan. The terms that a lender is offering are the most important things in the whole transaction. The two principal terms to pay attention to are the interest rate and the repayment details, and for obvious reasons.

Knowing that both of these aspects are in your favor, with an affordable interest rate and schedule that is manageable, is essential before signing any loan agreement. That is why, when getting loans that are unsecured, it is important to shop around for the best deal. This is generally where the online lenders win out.

However, be prepared to accept higher interest rates when there is no collateral, and if the term is short, this might also be something to consider. Short term loans will take less time to clear, but the monthly repayments will be higher. So, it is worth considering unsecured loans that are long term, especially when the sum being borrowed is around $25,000.

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