When someone needs funds quickly in order to resolve a pressing financial emergency, an unsecured loan may be the best option available. Compared to other ways of borrowing money, unsecured loans are available with fewer restrictions and can be disbursed faster. Of course, as with any type of loan, it is important to make responsible decisions and prepare your budget in order to pay off the loan in a timely fashion.
What Is an Unsecured Loan?
An unsecured loan is a somewhat generalized term, which can be applied to various types of loans, including the following:
• Payday loans
• Cash advances
• Paycheck loans
• Bad credit loans
Technically, an unsecured loan is any type of loan that does not require collateral. A secured loan, such as an auto title loan, requires an applicant to put up something valuable to serve as a form of security to cover the amount of money they want to borrow. An unsecured loan does not have this requirement; rather, it relies simply on the borrower’s promise to repay the debt. For this reason, unsecured loans are available to a much greater pool of applicants than other types of loans. Another reason why these loans are more accessible is that generally they do not require a minimum credit score, allowing those with a poor credit history to gain approval.
Interest Rates and Other Fees
Lenders require collateral with secured loans because it allows them to limit the risk of losses incurred should the borrower default on the loan. When a loan does not have collateral, lenders do their best to minimize risk in other ways.
Unsecured loans generally have markedly higher interest rates than other types of loans because there is no collateral involved in the loan contract. Charging these higher rates results in borrowers being less inclined to extend the life of the loan.
Lenders also generally do not lend amounts much higher than $1,000 without collateral. While higher amounts are possible, they may only be available to repeat customers with a proven history of timely repayment.
It is extremely important when taking out an unsecured loan to be fully prepared to repay it quickly. This is because, should your repayment period be extended, the loan’s high interest rates can potentially result in a significant increase in the total amount that you will be required to repay.
Prior to receiving an unsecured loan, a lender will issue documentation of the loan. This is a federally mandated resource for consumers. It will contain the details on all interest rates, financing fees, the repayment plan, repayment extension options and all possible penalties. While an emergency financial situation may make you feel pressured into making a quick decision, it is imperative that an appropriate amount of time be spent reviewing this documentation.
Planning for the Future
Since there is no obligation to sign a loan contract once you have received the loan details, this is the perfect time to calculate your upcoming budget and assess whether or not an unsecured loan is your best option. It is recommended that you do the following:
• Ask yourself if your financial situation truly requires you to take out this loan: Will you be spending it on a pressing necessity?
• Calculate exactly how much money you need and plan out how the funds will be spent. It is never wise to over-borrow.
• Calculate your budget for repaying your loan. It is extremely important to manage your funds properly as you move through the repayment process. Remember, you will actually have less money than normal as you make payments.
• Finally, do your best to plan your finances for the future in such a way that you can lower the chance that you may need another unsecured loan right away.
If used properly, unsecured loans allow consumers to retake control of a financial emergency. However, falling into a cycle of taking out loans to repay previous loans can be far worse than the initial emergency. When taking out an unsecured loan, it is wise to exercise caution and make a financial plan accordingly.