If you’re looking to obtain a personal loan, you have two basic options: unsecured and secured.
Unsecured loans can be used for any purpose, such as to pay off debt or start a business.
The main difference between unsecured and secured funding is that the former isn’t backed by collateral or assets.
When you take out a secured loan, you give the lender “security” that they’ll have something to cover your debt in case you fail to pay up, such as a vehicle or property.
On the other hand, going unsecured means the lender is taking your word that you’ll repay your debt to them.
However, if you don’t pay back what you borrowed, the lender still has recourse, including taking you to court – so this is hardly a risk-free source of funding.
If you don’t have collateral to put up to secure your loan, the unsecured loan route could be your only option.
But because the lender is extending you a loan without security, you’ll almost certainly need a good personal credit score with a demonstrated history of repaying your debt.
In each case, the lender will take into account the “5 C’s” of credit:
The last of which will be nothing but your word in the case of unsecured funds.
If you’ve got good credit and want to go unsecured, you have a number of choices.
One is a signature loan
A signature loan is your basic unsecured option and can be used in any way you’d like – debt consolidation, starting a company, buying expensive bedding, whatever.
In this case, you secure the loan with your signature. It’s the legal equivalent of a handshake deal.
This is a personal loan that you can get through banks and credit unions, and typically you pay it off in installments that amortize over time.
You pay a fixed amount – a portion of the principal, plus interest – until you’re square with the lender.
Generally, signature loans are good vehicles for people to help rebuild their credit (more on that later).
Another option is a credit card, which functions as a line of credit:
Rather than receiving a set amount that you pay off in installments, you simply charge whatever money you need, whenever you need to, up to your pre-set credit limit, and pay it back when you can.
Peer to peer loans is an increasingly popular option in this space as well.
P2P loans involve posting loan requests through online lending sites, where individual lenders (including, potentially, friends and family) can fund your loan.
Another form of unsecured funding, used for a very specific purpose, is a student loan.
These loans are specifically issued to students for paying off their education costs, but they typically have interest subsidies and other perks.
First of all, you need to get yourself back on track and improve your credit score, which can unlock greater lending options.
You may want to look into a secured loan – putting up your house or business assets as collateral – and improve your credit score by paying that off on time.
If you can get a small signature loan and repay it quickly, you’ll be on your way to improved credit and the ability to take out a larger, more favorable loan.
As mentioned above, a lender that allows you to get a loan without collateral isn’t just going to walk away if you can’t pay your debt.
The lender may take you to court and have your wages garnished.
They may send a collection agency after you to collect your debt.
Either way, recognize that you’re not getting free money here – the lender will get their money back one way or the other, so do yourself and your credit score a favor and don’t default.
Get started at LendGenius to connect with a lender and see what they can do for you.