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What is an Unsecured Loan?

Oct 9, 2007
When most people apply for a loan they apply for an unsecured loan. There are times when the loan must be secured, which is when the borrower must put up collateral in order to get the loan, for the most part, consumers loans are usually unsecured loans.

As stated above, an unsecured loan does not require the input of collateral from the borrower. The decision to approve the loan is made using other variables such as credit history and current income levels. This article details some of the more important issues that consumers should understand before they take out an unsecured loan.

Unsecured loans can be used for such purchases as homes, cars, boats, and other consumer goods. They are also used for credit cards and signature loans. These types of loans are most usually initiated through a bank or credit union, but they can also be initiated through less official means.

Of particular importance when applying for an unsecured loan is the interest rate that will be charged for the loan. The interest rate for an unsecured loan can vary greatly and can take several forms. For instance, you may apply for a fixed rate loan which means that the interest rate will not change over the life of the loan. You may also apply for a variable interest rate loan which is a loan in which the interest rate will vary as the prime lending rate varies. Whether you benefit most from a fixed rate loan or variable rate loan will depend on many factors and consumers would be well advised to explore all of the possibilities before accepting one over the other. This can be especially important when the unsecured loan is going to be used for a big purchase such as a home or new car.

Because there is no collateral involved in an unsecured loan the lending agency will use your personal credit history as the basis for approving or denying the loan. In almost all cases, this information comes to them through the data that you supply on the application form and through the major credit reporting agencies. Here are a few tips you can use to help improve your odds of getting an unsecured loan.

Be truthful on the application form. The information that you supply will be checked, and if you are using false information the lender will be much more hesitant to trust you with a loan, especially one that is not secured with collateral.

Order copies of your credit report before you apply for the loan. When you receive your credit reports, examine them carefully for errors or omissions. If you find mistakes notify the agency via their contact policy and have the mistakes fixed as quickly as possible. Do understand that if a mistake is valid but you have a good reason for being late on a payment or some such thing, you are allowed to write a letter and have that included with your report. You should also know that you are allowed one free copy of your credit report from each of the major agencies per year. This is the best way to know what the lender will see in advance of approving or denying your unsecured loan.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Unsecured Loans and Mortgage
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