If you need a loan for any purpose at all or even for certain limited uses, you’ll usually have a choice between a secured or an unsecured loan. Both loans can have some similar requirements and certain advantages to them, but there also are some real differences. The main difference between unsecured loans and secured loans has to do with how you qualify for them and the penalties for not repaying them.
No Collateral with an Unsecured Loan
If you take out an unsecured loan, you will not need to offer the lender any collateral for it. For example, a secured loan like a home mortgage, home equity loan or auto loan will require you to allow the lender to put a lien on your home or car as collateral. If you fail to repay that loan, the lender can seize the collateral. With an unsecured loan, there is no collateral but if you do fail to repay it and are deep in debt, the lender could take you to court and get a lien on assets in order to recover their money. But typically to get access to funds in an unsecured loan, all you need to do is just sign the paperwork.
How You Qualify for an Unsecured Loan
Since all you usually need is just your signature on an unsecured loan stating that you’ll repay it, getting approved for it will come with more requirements than an unsecured loan. You’ll need to have enough personal income to be able to repay the loan and still meet your living expenses, which is why nearly every lender asks for proof of it when you apply for payroll advance loans and similar types of unsecured loans.
Most Common Kinds of Unsecured Loans
You might already be using an unsecured loan and not even realize it. Most are issued through your bank or credit provider, but there are a few that come from alternative lenders. The following types of loans are the most common with non-collateral loans:
- A credit card is the most common kind of unsecured loan because you do borrow money every time you use it. Most credit cards are completely unsecured, though there are some secured ones that require deposits if your credit is damaged and you need to rebuild it. But even those usually transition into unsecured cards after you’ve made payments over a given time.
- Student loans are unsecured because college students usually don’t have a credit history and many don’t have the income needed to repay them until later. Student loan lenders are essentially banking on the expectation that a college degree will lead to more income for the borrower and therefore an ability to repay the loan. It’s worth noting that unlike most other forms of debt, student loans cannot be discharged through bankruptcy.
- Personal installment loans are also unsecured because all you need usually is a job and an active bank account in order to use them. In other words, they’re ideal for those with less than perfect credit scores. They are risky in terms of interest rates and severe collection actions the lender could take if you fail to pay them back, and they’re usually only recommended as a last resort.
In conclusion, it’s important to understand what an unsecured loan is before deciding to apply for one. While they are incredibly useful financial instruments, especially for those with no credit or bad credit, they should never be taken out without careful consideration on the part of the borrower.