Unsecured loans are those loans that are not backed by any security, i.e., the lender does not have any security to sell and recover the dues in the event the borrower defaults on such a loan.
Because of this lack of security, banks and other financial institutions generally opt to grant only small-unsecured loans. Apart from these, there are private lenders also who grant unsecured loans.
There are different types of unsecured loans, such as unsecured small business loans, unsecured personal loans, and unsecured business loans etc.. However, individuals and businesses can also get unsecured cash loans from friends, relatives, and acquaintances. In such cases, however, interest rates may not be as high as they would have been when such loans are taken from any private lender.
Interest charged on all these unsecured loans is slightly higher than that on other secured loans because of the risks involved. Even the period for which such loans are granted is much less.
Advantage of unsecured loans is that they can be used to meet immediate or temporary requirements. Therefore unsecured consolidation loan can be used to consolidate some costlier credit card debts. Unsecured bank loans can be used to for the same purpose.
Unsecured business loans can be used for regular requirements of the business. These need not essentially be from regular lenders, or banks. Such loans can also be obtained from owners of the business or their friends and relatives. At times, angel investors grant such unsecured business loans.
There are ample lenders offering fast-unsecured loans through Internet. The paperwork involved in getting such loans includes bank statements, address proof, proof of employment, income proof, track record on any existing loans, and/or previous loans, previous income tax returns, etc. Credit card score also helps. Depending upon the income, and past records, the lenders decide on what should be the rate of interest that should be charged. Obviously, the person who has a good income, and whose credit score is good would be offered the unsecured loan at lower interest rates.
Time is of essence in obtaining unsecured loans. This is because many times people who look for unsecured loans are short of time. They may, at times, have enough assets but opt for fast-unsecured loans, to meet some exigencies as obtaining secured loans takes time.
Generally mortgage loans are granted for some specific purpose, such as purchase of some real estate property like home. Unlike this, there are no restrictions on how or for what the unsecured loans will be used by the borrower.
Repayment schedule for unsecured loans is considerably different from that for secured loans. Unsecured loans are hardly ever repaid in equated monthly installments. Generally, the borrower is expected to pay only the interest for as long as the unsecured loan amount is due. And the loaned amount is payable as a lump sum, at the end of the term, which is not as long as that for home loans or other mortgage loans.
Borrowers who have a good reputation in financial markets can also consider taking unsecured signature loan when they need monies urgently. In this type of unsecured loan, the borrower signs a promissory note. This promissory note can be surrendered to a third party, who then owns the promise in it. The promissory note has a promise from the executor that he has borrowed the mentioned amount, and that as long as the borrowed sum is not paid back, he and his heirs would remain liable.