What is An Unsecured Loan? Clearing The Confusion

what is an unsecured loan

Loans…There always comes a time when we all need one. Its almost a guarantee that one will need a loan at some point in their lifetime. When a loan application is approved, the borrower’s credit profile and debt history will be the key determining factors as to whether a granted loan will be secured or unsecured.

What is An Unsecured Loan?

In the simplest of terms, an unsecured loan is a loan that is not protected, or does not require any form of collateral (like properties and assets) to recover in case of a default. Rather, it is based exclusively on the “credit-worthiness” of the borrower. Banks grant loans because they believe that the borrower can pay back the loan on the basis of their financial resources. A signature loan is a good example of what has been conventionally considered as an unsecured loan. Student loans are also another good example of unsecured loans.

The Breakdown of Unsecured Loans

To be eligible for an unsecured loan or a line of credit from a bank or a lender, a borrower generally must have high credit ratings (think of a 720+ personal credit score and a strong relationship with the banker). However, a vast majority of lenders would rather secure loans with some sort of collateral in form of real estate and other valuable assets or even the item purchased by the lent money – all as a fail-safe in case anything doesn’t go as planned….And by this I mean if the borrower doesn’t pay up.

The loan-to-value ratio of your collateral

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This is undoubtedly one of the elements a borrower might want to consider setting straight with their potential lenders before signing any dotted line. Normally, lenders (banks included) establish the loan-to-value ratio of a borrower’s collateral based on the nature of assets in play. In a nutshell, a banker may let you borrow up to 75 percent of the appraised value of the real estate or even 60 to 80 percent of the value of what they refer to as ready-to-go inventory. Lenders consider their loan-to-value ratios differently so you as a borrower will need to inquire and have a clear picture of how a potential lender intends to set that value.

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However, there exists a type of lender whose view of unsecured loans is a little bit different from the traditionally implied sense of the phrase. These lenders, rather than securing a loan or line of credit with a particular collateral, they apply a general lien on the borrower’s business assets until the loan balance is fully paid. This strategy grants access to financing to borrowers without a flawless personal credit score as well as those borrowers who have healthy businesses, but they do not want to tie up business assets or do not have the assets to tie up in order to get a small business loan.

A Different Type of Unescured Loan: Online Lenders

Unlike the conventional lenders, online lenders do not need the same strict credit standards that a bank might require in order to grant a loan. Therefore, even if your credit profile is less-than-perfect, as long as you can make evident the healthy essentials, it is possible that an unsecured loan or line of credit could be just the thing you need.

Usually, these loans are accompanied with interest rates that are higher than a similar secured loan. On the other hand, if you choose to turn a blind eye to the high interest rates, there are some benefits accompanying unsecured loans through online lenders that you may want to consider.

The Benefits Are:

1. Quick

You want to take advantage of a business opportunity that requires you to act fast, but you don’t have the capital? Apply for an unsecured online business loan!

Online lenders have virtually become synonymous with almost immediate approval times, with some cases taking just a few minutes for applications to be approved. In addition, once your application is approved, the money can be in your account within just 48 hours.

2. Don’t Depend on The Value of the Collateral

When applying for the old-fashioned secured loan, the formula for ascertaining the loan amount is calculated based on a percentage of the particular assets that are put up as collateral.

However, the beauty of unsecured loans through online vendors is that you may be eligible for more money owing to the fact that the lenders make conclusions as to whether you and your business qualify for a loan based on your business and personal credit profile, the health of your business and your cash flow.

3. Can Help Build Credit Rating

Remember the proverbial double edged sword? Now this is exactly that. It can make you…or it can break you. Unlike usage of your personal credit cards or other forms of financing, unsecured loan lenders report your payment history to the relevant business credit bureaus. Your timely (or untimely) payments will help you strengthen (or ruin) your business credit profile. The importance of asking about this before making any commitments cannot be stressed enough.

4. You Can Get An Unsecured Line of Credit Instead

Suppose you have a preference for a line of credit instead of a loan, some online lenders can provide you with an unsecured line of credit that you can use as much as your needs dictate, you repay, and then you use it again. The advantage of the line of credit is that you only pay interest on the amount of money you use with the line of credit, and not any of the available line you do not use.

While it may not be the perfect go-to option for every financial situation, unsecured loans and lines of credit are surely a welcomed tool that borrowers and business owners can use to gain access to quick capital, as long as it suits the loan purpose well and the economics of the loan add up. When inspecting any form of financing, the importance of talking to a potential lender and ensuring that you fully understand the terms and the costs is paramount.

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