When you think about the borrowing options you have, you will come across two types of loans, secured loans, and unsecured loans. You need to understand these two types of loans, and the one you opt for will depend on your needs.
A secured loan, as the name suggests, requires a security or collateral that you provide to the lender. For instance, a bank may give you a mortgage loan, but as collateral will pledge your existing property and mark a lien on the property documents. Therefore the secured loans are for more significant borrowing. You may qualify for the financing when you have something to provide to the bank as security.
These are loans where you do not provide any security to the lender, and thus, the lender is at a higher risk in case you default on the repayments. Personal loans and short term loans are examples of unsecured lending. So how does a lender mitigate the risk with unsecured loans? Banks, for instance, will provide such borrowing only if you have a good credit score. A credit score is a blueprint of all your previous financing and its settlement. If you have a good credit rating, it provides the bank the confidence to extend the loan to you. However, if you have a history of late payments or defaults, your application for an unsecured loan won’t go far.
Banks will also charge higher interest rates on unsecured loans, as opposed to the secure ones. So it would help if you weighed in the repayment. It depends on the urgency of your need, and the interest rates when you apply for the loan.
Unsecured loans are short-term borrowing, and they have a smaller tenure for repayment. Besides banks, you also have other options to consider, especially if you are looking for unsecured cash loans, or your borrowing requirement is not high.
For smaller lending, it is better to find other lenders online or go for a payday loan. Bank loans are more firm with their requirements, and not everyone can meet their qualification criteria. Online loans are easier to get, and they may even consider a loan application with a fair or average credit history.
Unsecured loans are short tenure loans, so it is better if you check all your options as well as the processing fees of the lenders. A high processing fee will increase the cost of the loan.