What is an unsecured loan?
An unsecured loan is a loan that is not secured against an asset. So, the loan is supported by the borrower's creditworthiness rather than an asset. As a general rule, your creditworthiness will determine the interest rate you will be charged on your loan. The better your credit rating, the better your interest rate.
Differences between an unsecured and secured loan
There are not too many differences between the two loan types other than the loan term and interest rate. As a general rule, a secured loan can be taken over a longer repayment period and are generally subjected to a lower interest rate. A longer term and lower interest rate generally would mean that your monthly loan repayment is smaller.
- Rate determined by borrows credit rating
- Generally used for holidays, weddings, emergencies, home improvements
- Loan secured by an asset
- Generally used for car purchases, mortgages etc
Why apply for an unsecured personal loan?
An unsecured loan is straightforward, you borrow money from a lender and repay it back over the agreed term. The interest rate is determined by your credit rating but unlike a secured loan, your assets are not at risk. That said, for borrowers who do not have any assets to secure a loan, an unsecured loan is generally a viable option for them.
Unsecured loans could be a great way to raise money for your individual needs. They are safe, risk-free and easy to apply for.