What You Need to Know When Borrowing Unsecured Loans

Unsecured Loans

The unsecured loans industry has been on a steady growth. In recent years, the number of companies offering unsecured loans industry has continued to grow. We see them all the time. These are companies like peer-to-peer marketplaces like Lending Club and Prosper and online banks like Revolut and N50. There are other online lenders like Tunaiku, Ally Bank, and SoFi that are changing the world. In this article, we will look at some of the things you need to know when using an unsecured loan product.

Shorter Duration

Unsecured loans are loans that do not require a collateral. These loans are offered by financial companies based on trust. Lenders use your history to determine the amount of money to lend you. They get information from credit bureaus. These are companies that collect information from banks and other lenders and give you a score. People who borrow more and pay on time have a better score than those who delay. Therefore, because these loans are given out on the basis of trust, lenders are known to start by offering a shorter duration. This is the opposite of what secured loans have. Secured loans are backed by a collateral like a piece of land, building, or a car. Therefore, these are assets that the lender can always repossess if you default.

Based on a Relationship

Unsecured loans are usually based on relationships. This is because the lender only uses trust and your credit score to lend you money. Therefore, the lender will always start by giving you a substantially small amount of money to see whether you are a good customer. Your goal is to pay back the money time and improve your relationship with the lender. With secured loans, you don’t need to have this type of relationship. You just need to pay back the money, and if you don’t, they will repossess the security.

Higher Interest Rate

Unsecured loans will always charge you higher interest rates. This is because lenders use higher rates as a sort of an insurance policy to ensure that you pay back the money. Here’s an example. Assume that you had two friends who need financing. One gives you a car as a security and the other one has no security. Will you give them similar interest rates? The reality is that you will trust the one with a collateral more. As such, you will give him a lower interest rate. The same logic applies in the unsecured loan industry. Banks tend to trust people who have a security. Indeed, the industry has in the past been a target by politicians because of outrage in the predatory lending.

Therefore, there are several things you need to do if you want to use unsecured loans. First, you need to ensure that you always pay your loans and bills on time. Second, you need to ensure that you use a single company. This will help you create a relationship with them. Finally, you need to ensure that you only borrow when you need. This is because you don’t want to get into excessive debt.