Unsecured personal loans are loans that are provided by a lender without any requirement for collateral to ensure loan repayment; instead they are secured by the borrower’s creditworthiness or past good record of repaying loans. These types of loans, sometimes called personal loans, are approved without assets such as property having to be provided as surety.
Loan terms for unsecured loans are based on the borrower’s credit rating. A borrower must have a high credit score to be approved for certain types of personal loans. Credit scores are maintained by credit ratings agencies as a numerical representation of a consumer’s ability to make regular repayments on loans and to complete repayment within the loan repayment period.
On the other side of the ledger, unsecured loans are riskier for a lender than secured loans and they consequently attract a higher rate of interest for payments (once again this may be dependent on the borrower’s credit score). Examples of unsecured loans include student loans, credit cards and personal loans.
There are various other types of unsecured loans including:
• A revolving line of credit that allows the borrower to spend, repay and spend again up to a specified limit.
• A term loan where the borrower makes repayments in equal instalments until the loan is paid off at the end of the loan period (or term).
• A consolidation loan that is used to pay off one or more credit cards.
While a personal loan is not secured, the borrower can commission a collection agency to seek to recover the debt if the borrower defaults on payments. They can also take court action to recover funds that have not been repaid. Failure to complete repayments on an unsecured loan will also lower a person’s credit score significantly.
In some cases lenders will allow loan applicants that have a credit score that is insufficient to qualify for an unsecured loan to provide a co-signer. This person will undertake the legal obligation to repay the amount of the loan that is outstanding when the borrower defaults on repayments. This means the co-signer is liable to pay the outstanding interest and principal loan repayments for the remainder of the period of the loan.
The Unsecured personal loans market is growing powered partly by the entry of new financial technology companies in the area. Recent trends have given rise to peer-to-peer lending through online and mobile lenders which has led to a sharp increase in the number of unsecured loans.