Do you have amazing credit? If so, that means you’ve probably had a few unsecured loans over the years. It’s the most common type of loan, especially among those who don’t own land or a house.
Unsecured loans rest entirely on how credit worthy people think you are. Credit cards are a type of unsecured loan that almost everyone has. Other types of unsecured loans are personal loans, payday loans, and student loans.
What Are Unsecured Loans?
A traditional secured loan entails you having something worth a lot of money to put up as collateral. A mortgage is a great example of this – you are buying a house by using that house as collateral. If you default on the loan then you lose the house.
A secured loan has you “securing” that money with something of value the bank can take from you.
A Leap of Faith
Unsecured loans are a different beast. There is no collateral, and you, the borrower, are putting up nothing of value that you can lose.
These sort of loans require a leap of faith, so to speak, from the lender. They will look at your credit history usually, evaluate your income, and decide if you are a worthy risk. But it IS a risk, because if you default they have nothing they can take.
For this reason, unsecured loans tend to carry higher interest. This is the lender trying to protect their business.
And can you blame them? Every customer they get is a roll of the dice!
Best of Both Worlds
Secured loans not only have lower interest, but they also tend to be “term loans” or installment loans. Credit cards and payday loans are open-ended revolving debt, with no set end date. This makes them more expensive and harder to pay off.
But now there is a new kind of installment loan. Like secured loans, they have set payment schedules and locked-in interest rates, but they are unsecured loans, so they don’t require collateral.