If you need to borrow money in an unexpected emergency, you may feel overwhelmed with your options. There are plenty of broad categories of loans and lines of credit to choose from, and each one may be better suited for specific situations or borrowers.
One of these potential options is the unsecured personal line of credit. These loans are called “unsecured” as they do not require you to put a collateral on the line when you apply for them. But there’s a lot more to these products that fall under the “unsecured” banner.
Today, we’ll take a look at what it means to borrow without collateral, what kinds of unsecured loans there are, and how to qualify for these products.
Unsecured Loans: A Definition
An unsecured loan is a type of loan that won’t require you to put up collateral in order to qualify. Instead, the financial institution servicing the loan may focus more on your credit score and certain other aspects of your financial profile to assess your creditworthiness.
For those who are unfamiliar with how the process of loan applications generally works, you may need some further explanation. So, let’s take this definition apart by looking at what the two ‘Cs’ mean: creditworthiness and collateral.
Creditworthiness is a Risk Assessment Tool
Creditworthiness is an estimate of how likely you are to repay a personal loan or line of credit. It helps financial institutions appraise the risk they take on. As such, it may be a deciding factor of whether your application will be approved.
Financial institutions may look at your financial information like your past borrowing history, income, and debt-to-income ratio to verify your creditworthiness.
These metrics help them determine the following two things:
- Are you a reliable applicant? Missed payments and delinquencies in your past may cast doubt on your ability to make your payments on time. On the other hand, a history of on-time payments may generally boost the chances of your application getting approved.
- Can you manage the payments? Other information about your income, pay frequency, and current debt load may help financial institutions determine if the loan payments are a reasonable addition to your budget.
We’ll take a look at these metrics in more detail below. But for now, think of it this way - loans approved by assessing your creditworthiness are generally based on your ability to repay your debts.
Collateral is a Form of Insurance Against Risk
With collateral, things are slightly different. While a financial institution may look at all the information mentioned above, they also consider collateral against your ability to repay what you owe.
Collateral is a valuable asset you pledge as a backup in case you can’t repay your loan on time. If something prevents you from paying what you owe, your financial institution may claim your collateral as a form of payment.
It usually ends up being a piece of property, like a home or car, but it may be a variety of belongings.
Collateral may be used in lending situations a financial institution considers particularly risky, like if an applicant shows poor creditworthiness.
That’s because collateral adds some sort of a security, which is why loans that rely on collateral are called secured loans and loans without collateral are “unsecured”.
However, keep in mind that if something happens that may make it impossible for you to pay your loan back, you may have to say goodbye to your valuable belonging.
So What Are Unsecured Loans Online?
Unsecured loans don’t require you to pledge collateral when you apply for them.
Instead, a financial institution looks at various criteria, including your creditworthiness, when deciding if they should approve your application for an unsecured loan or line of credit.
And because “online” is there in its name, this decision happens over the Internet. You may even do some research on a financial institution’s website to see if you meet their requirements for qualification.
What Types of Unsecured Loans Can You Find Online?
In an unexpected emergency, you may begin to do your research over the Internet. You’ll see that generally, there are a lot of different fast unsecured loans that you have the option of applying for online.
Here are some of them below:
1. Credit Cards
Some people may have at least one credit card tucked away in their wallets. The average American carries four of them. Although these may come as a physical piece of plastic, you may apply for, use, and make payments on your credit cards online.
2. Peer-to-Peer Loans
Unlike a typical personal loan or line of credit, peer-to-peer loans don’t come from a financial institution. Individuals (or groups of individuals) underwrite and fund these loans via websites that connect borrowers with lenders.
3. Personal Lines of Credit
A personal line of credit works similarly to a credit card, as you may draw funds up to your line of credit limit. As you repay it, along with any interest and/or fees you owe, you may continue to make draws from your available credit. Always check the line of credit rates to make sure you understand how these charges impact what you owe.
4. Personal Installment Loans
In some instances, you may apply for unsecured personal loans online, such as installment loans. These loans can be used for a variety of reasons and you generally receive them up-front at the start of your term. They are required to be repaid along with any interest and/or fees over multiple payments or installments over a pre-determined period of time.
How to Qualify for a Personal Line of Credit or Loan That’s Unsecured
To put it simply, a financial institution wants to reduce its exposure to risk whenever they approve applications.
Generally, they want to make sure that you have the means to pay back what you owe by the deadline.
If you recall, your creditworthiness helps them determine if you’re able to repay your debt on time. So, before approving your request, they may look at the following information to see if you make the cut.
1. Credit History
How you managed debt in the past may give a financial institution a good idea of how you may handle it in the future. Your credit history (and corresponding credit score) shows your past borrowing behavior.
Some telling information may include:
- What you borrowed
- Whether your accounts are in good standing
- Any potential derogatory entries logged in your file
Depending on your credit history, you may qualify for online loans with lower rates from some financial institutions.
Luckily, you don’t need a flawless credit history to borrow. There are a variety of financial products available depending on your credit history. You may even qualify for a loan or line of credit for people with bad credit. Just pay attention to the rates, as these may be more expensive.
This is why it’s important to check your credit score and history before you apply for money online. A quick check lets you know what kinds of rates or loan amounts you may qualify for.
It’s also a good idea even if you don’t plan on applying for a loan any time soon. It gives you a chance to catch any bad habits or errors that may be damaging your financial reputation before the next time you apply.
How much you earn plays a role in your creditworthiness, especially when it comes to financial institutions that offer loans to borrowers with bad credit.
Financial institutions want to see that you earn enough to cover your payments, so you may have to provide details about your employment, income, and pay frequency if you submit a request for unsecured loans online.
3. Current Debt Load
A big, fat paycheck may seem like it could solve a lot of your financial problems. But it doesn’t always work out that way. Even 18 percent of people earning $100,000 a year still live paycheck to paycheck despite their six-figure income.
A bigger salary may not be a boost to your application if it’s tied up with other debts. Adding another loan to your already full plate may flag you as a risk to financial institutions.
A financial institution may ask to see your current debt load to confirm you aren’t overburdened by other payments. They typically check this by calculating your debt to income ratio.
This ratio reveals how much of your income is tied up in bills, loans, and lines of credit. Each financial institution may have different tolerance levels for how high this ratio may be. But generally speaking, the lower your ratio, the easier you may qualify for lower rates with some financial institutions.
What Happens if You Can’t Repay Unsecured Personal Loans Online?
While nobody plans on paying bills late, things out of your control can happen, making it impossible to repay by the deadline.
With unsecured loans online, collateral isn’t involved, so your most valuable possessions aren’t on the hook should disaster strike.
But just because collateral is out of the equation doesn’t mean you’re free of any consequences.
Late fees and additional interest may apply to overdue accounts. And in serious delinquencies, some financial institutions that offer unsecured loans online may sell your debt to a collection’s agency or charge-off your account. They may also attempt to recoup the value of your loan by garnishing your wages or seizing property. Just be sure to understand the consequences of missed payments before you apply for a loan.
Are Fast Unsecured Loans Right for You?
Looking into unsecured loans online may be an option if you fall short of what you need in an unexpected emergency. Take, for example, your car breaks down or your child needs to go to the walk-in clinic. If your savings aren’t enough to cover these bills on their own, you may consider applying for a personal loan or line of credit to help cover the expenses.
Because they don’t require collateral, some of the risk you take on by borrowing money is mitigated. You won’t have to pledge something valuable on your loan.
But applying for unsecured loans is still a big decision. It’s important to understand how to use a line of credit or loan responsibly.
Before making your choice, make sure you research your options carefully. Unsecured personal loans online generally tend to have higher interest rates than secured alternatives, so double check to see if these rates are manageable for your budget.
With a range of products to choose from, you may have a good chance of finding something that works for you. Once you do, get in touch with the financial institution to learn about what you need to qualify.
Posted in: Online Loans