In financial circles, a loan is an unsecured loan – the giving of money to another person or companies, organizations, or other entity – by one or more people, institutions, or other legally authorized parties. The recipient is legally obligated to repay the original principal sum borrowed and can incur a debt only after the period of repayment has passed. The term “loan” (as in “to borrow”) implies that there is a lending transaction involved. Typically, loans are unsecured – that is, there is no collateral securing the loan.
Traditional banks and credit cards provide the traditional means of loaning money. Banks may also issue home equity loans, equity-closing loans, bridge loans, and purchase loans. A home equity loan or home equity line of credit (HELOC) is a revolving credit line using your home as collateral. HELOCs may not be suitable for all borrowers because it relies on your house’s value at the time of the loan rather than the credit score of the borrower. For low and moderate-income borrowers, and for borrowers already in default, HELOCs can provide crucial help by providing a source of funds for unexpected expenses.
Another type of unsecured loan is a fixed-rate loan, which means the interest rate is guaranteed either to increase over a certain period of time or to remain level. Unlike HELOCs, fixed-rate loans cannot be added to, refinanced, or taken out against another collateral, so borrowers will not have the option of getting better terms or cost structures for the loan. For borrowers with poor credit histories or weak credit scores, a fixed-rate loan can be a great way to get approved. However, some lenders also look negatively upon people with bad credit history, so borrowers should be prepared for this possibility.
Secured loans differ from unsecured loans in that they require collateral. This collateral can be used as a type of deposit, or as security when the lender is not open to receiving payments. While most secured loans are used to borrow money to consolidate debt, there are also credit score unsecured loans that allow people to borrow money without placing any security up. If you plan on applying for one of these loans, it would be wise to check your credit score first so you would know what loan programs you qualify for.
Unsecured loans can be applied for in three ways – through the lender, through a broker, or through the internet. Most people prefer to apply online because applying via the internet gives you the option of comparing loan quotes from different companies. However, some lenders do accept secured loans through brokers. It is important though that you check if your broker is credible and reliable, and to check if the company you chose to borrow from has a good reputation. Some scam artists even offer a no-obligation quote; although it is rare, it does happen.
The interest rates for unsecured loans will generally be higher than secured loans. This is because the risk of missing a single payment is greater, hence the lender will charge higher interest rates to cover his expenses. Be wary of lenders who charge exorbitant fees for their services; usually, these lenders would require a high down payment as well as an unreasonable monthly payment. Although some of these loans may seem tempting, it would be best to settle for a lower interest rate if you do plan on repaying the loan in time.
