An unsecured loan is one of the most basic forms of lending known. This is due to the fact that there is no collateral involved in securing it. Collateral is a primary aspect of approving and backing up a loan with something of equal or greater value. An example of collateral can be a piece of real estate, currency, a valuable jewel, or even a profitable business. Should the borrower default on a loan secured by collateral, it can be repossessed and sold to cover the outstanding loan amount, as well as interest owed to the lender.
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An unsecured loan is also known as a personal loan within certain applications. This particular form of lending money is not easy to obtain. Though they are basic in structure, unsecured loans are reliant upon the credit rating and income of the borrower. Therefore, the ability for the borrower to repay the loan may be limited if he or she becomes unemployed. Since these loans are not secured by collateral, there may be little chance for the lender to recover all of the principal or interest. The payment history regarding previous loans and credit cards of the borrower will be researched in depth as well. Even one late credit card payment may result in the declination of a loan application.
In addition to a personal loan, an unsecured loan can be utilized to lend money to a business as well. Unsecured business loans can be created in which the business entity itself is responsible for repayment. It is the income stream from the business that would be the primary criteria for the approval of this type of loan. There are also unsecured business loans with personal guarantees that require an individual person to become solely responsible for repayment of the loan upon any default.
Many lending institutions find an unsecured loan to be an unattractive business venture. Those firms that may be willing to lend money merely on the good name of a person or a business have the strictest of underwriting requirements. Interest rates for unsecured loans are often much higher than those that are seen among the myriad of conventional loans found within today's lending marketplace. Prepayment penalties often accompany unsecured loans and their lengths can vary from three to ten years. Processing fees and other administrative costs can make these loans unaffordable. That is if the borrower can successfully navigate through the stringent underwriting criteria.
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