What is an unsecured Personal loan?

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Unsecured loans allow you to borrow money for almost any purpose. You can use the funds to start a business, consolidate debt, or buy an expensive toy. Before you borrow, make sure you understand how these loans work and what the alternatives are.

Basics of Unsecured Personal Loans

When a loan is unsecured, there is no property or collateral to “secure” or guarantee the loan. For example, a mortgage loan is secured with property - if you don’t repay the loan, your lender has the right to sell your home and collect what you owe out of the sales proceeds.

With unsecured loans, nothing specific has been pledged as collateral. This makes them a little less risky for you (the borrower) because the consequences are not as immediate if you fail to repay.

Lenders, on the other hand, take more risk with unsecured personal loans. They don’t have any property to sell if things go badly, but of course they have other options available if they want to pursue repayment (they can take legal action against you and attempt to garnish your wages, for example).

Because lenders take more risk, they generally charge higher interest rates for unsecured loans than they do for secured loans.

Your credit is one of the most important factors that determine whether or not you’ll get an unsecured loan. If you have good credit, you’ll pay lower interest rates and you’ll have more options available to you. With bad credit, you can’t be as choosy, and you may need a co-signer to get approved for a loan.

Types of Unsecured Loans

There are several types of unsecured personal loans, and each one comes with tradeoffs. Try to pick the loan that best meets your needs while minimizing cost.

Interesting facts

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