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What are Unsecured Loans?

April 30, 2021 by Daniel Azzoli

unexpected expenses

Picture this. Your air conditioner breaks during the summer and you’re not in a financial position to buy a new one. The temperature outside, even in the shade, is in the triple digits while inside your home, the temperature easily spikes to 95 degrees in the afternoon. You look at the fan in the corner of your home with frustration as it simply blows that hot air back at you.

If you find yourself in this position, you may have to figure out a way to find the money to pay for that air conditioner instead of trying to tolerate the sweltering heat for the rest of summer. With no extra money lying around, one option may be to apply for an unsecured loan. There are many financial institutions out there that can potentially provide you with the money you need to help you take care of your financial emergency.

But what are unsecured loans exactly? Today, we’re going to define this term for you, walk you through some of the important details surrounding these loans, and go through the different types of unsecured loans that may be available to you.

Unsecured Loan Definition

Whether they come from banks, credit unions, storefront lenders, or online lenders, unsecured loans are some of the most common borrowing options out there. In this case, we’ll be talking about unsecured personal loans such as small-dollar installment loans, payday loans, lines of credit, student loans, and more.

Person looking up unsecured loans in dictionary.

Secured vs Unsecured Loans

To understand what unsecured loans are, it might be a good idea to highlight the differences between them and their secured counterparts. The biggest difference between these two categories of loans is that to qualify for unsecured loans, you won’t need to provide collateral, whereas with secured loans, you do.

The collateral for a secured loan typically allows the borrower to qualify for a lower interest rate compared to an unsecured loan where no security is provided to financial institutions to ensure that they’ll receive some sort of payment if you default on your loan.

Mortgages and car loans are two of the most common types of secured loans. The home and the vehicle are the collateral for these types of loans, with the lender having the right to repossess these assets if the borrower fails to pay. Apart from a car or home, lenders can accept other property of value like jewelry, real estate, stocks and other investments as collateral for secured loans.

Since collateral is not required for an unsecured loan, unsecured loan providers may probe deeper into your finances to determine if you are able to pay them back. This will typically involve checking whether you’re employed and how long you’ve been working at your current job, amongst other things. Steady income is generally a major determining factor in an unsecured loan approval process, especially if your income is low relative to your required payments. Some financial institutions may even dig further by checking your credit history to see how well you’ve been paying your past bills, as this is usually a good indicator of how you will pay your future bills. However, there are certain financial institutions out there that offer loans for people who may not have the best credit history. Since there’s less evidence of your ability to pay back what you’ve borrowed in these cases, rates for these types of unsecured loans tend to be fairly high. Because of this, they should only be used as a last resort in emergency situations.

Types of Unsecured Loans

Though it may not be the first thing that comes to mind when you think of loans, a credit card is one of the most common forms of unsecured loans used by Americans. With a credit card, it is sometimes easy to fall into a cycle of only making the minimum payments, which could make it an extremely expensive borrowing option.

People researching unsecured loans on their computer.

While credit cards can help with day-to-day transactions and even unexpected emergencies, if you run out of options, some traditional unsecured loans may also be useful. They have a specific loan term, which may make it easier to limit the amount of time you stay in debt for because you are required to repay in full by a certain date. Payday loans provide a lump sum payment and are due on your next payday while installment loan payments may typically be scheduled on your paydays but can extend for weeks or months, depending on the amount borrowed, your lender and the state you live in. Americans use both payday and installment loans to cover unexpected expenses that pop up from time to time. Some of these reasons may include things like:

  • Emergency medical expenses
  • Unforeseen home repairs
  • Unexpected car repairs

Whatever you use your loan for, keep in mind that unsecured short-term loans are expensive forms of credit and are intended for situations when you’re temporarily short on funds, not as a long-term financial solution.

Potential Benefits of Unsecured Online Loans

If we look at the borrowing process that someone would need to go through to get a loan fifty years before the Internet was popularized, it might look something like this: a customer would go to a bank and request an unsecured loan. The teller would request an employment verification letter to prove the consumer was employed. After the employment verification letter was provided, the customer would then fill out a loan application form that would be sent to a loan officer or manager who would perform a credit check before approving the customer. The process was a relatively long one, taking several days and potentially even weeks in some cases.

One of the issues here is that there are a few big reasons why this process isn’t particularly convenient, or even manageable in some cases. First off, there are many working adults who may qualify for unsecured loans but don’t have the time to visit a storefront for a loan appointment. Secondly, when you’re staring down an emergency expense, the faster you deal with it, the quicker you’ll find some semblance of relief. In fact, letting an emergency expense linger may even lead to a bigger expense down the road, depending on the situation. In these situations, you may not have weeks or even days to wait to find out whether or not you’ve been approved for a loan.

person smiling and researching unsecured loans on their laptop.

This is where there may be some benefits to applying for online loans. Financial institutions that offer online loans have made the borrowing process a lot simpler with the help of technology. You can use your smart phone to apply for an unsecured loan and this process may only take you a few minutes to complete. You can also do this from anywhere you have internet access, and you won’t be subject to the business hours of the financial institution just to start your application.

Some online lenders use cloud-based technology to process applications and payments for their loans. This greatly speeds up the customer’s experience, as an applicant will not only be able to get a quick answer on whether or not they’ve been approved for a loan, but it can also mean that they may get the funds in their bank account quicker than they would if they had to wait weeks for the approval process to conclude. Many consumers have come to expect this kind of speed from a lender and want the option of applying for a loan at their convenience, whether it’s 3 p.m. or 3 a.m.

Do More Research on Unsecured Loans and Other Financial Products

When you’re dealing with an emergency expense, there isn’t always a clear solution waiting for you. Everyone’s personal situation is unique, and there are all sorts of variables that could make one decision right for you, but completely wrong for someone else.

Having said that, there are a whole host of financial products out there that may be suited to help people in a situation like yours. Unsecured loans may be just what you need to help you manage a financial emergency when you don’t have much money to spare.

Regardless of what you ultimately decide to do, remember that any decision you make that involves your finances shouldn’t be taken lightly. This may be especially true if you’re working within the confines of a tight budget, and don’t have much (if any) money left over to help you deal with emergencies. In the end, make sure to be thorough in your research and consider every step carefully. We hope this article has helped!


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