Trying to get the best deal on an unsecured loan? Read our expert guide for all the facts…
The finance industry is one of the biggest in the world. It is the industry that powers the entire universe. This is simply because it is banks and lenders that fund companies that employ people. The industry is also very big. In the United States, it is the industry that has helped turn small companies like Google and Facebook into the global juggernauts that they are. On lending, the industry has come up with simple concepts like credit cards, secured, and unsecured loans. In this article, we will look at everything you need to know about unsecured loans.
What is an Unsecured Loan?
The most popular types of loans are secured. These are loans where lenders ask for a collateral. This collateral is also known as a security. It is known as a security because the lender will take possession of it if you fail to pay. Secured loans are extended to any person who has a good collateral that has been valued by the lender. As such, it usually requires more days to because the lender must evaluate the collateral. An unsecured loan is different because lenders look at other details to decide the amount of money they give you. Mobile lenders look at your transaction history and your credit score. Online lenders like Tunaiku look at these details to determine the amount of money to give you.
As mentioned, unsecured loans usually look at your credit score to determine how safe it is to give you money. A credit score is a complex document these lenders receive from credit bureaus. This is how it works. Whenever you borrow money, the lender passes this information to a credit bureau. This credit bureau receives this data from multiple sources. After doing this, they compile your record and pass the information to a credit scoring company. A credit scoring company like FICO analyses this data and then assigns you a number. It is this number that unsecured loan providers use to gauge whether to lend to you or not.
Unsecured Loans are More Expensive
Obviously, an unsecured loan is usually more expensive than a secured loan. It makes sense because with an unsecured loan, the lender does not have many ways of pursuing you in case you default. In most countries, the only thing that they can do is to list you with a credit bureau. Secured loans on the other hand are relatively cheaper because the lender does not have the fear that you will default. If you default, it will take away your possession. Therefore, it is often better to take secured loans if you can.
A relationship matters
Having a good relationship with the lender matters. In most cases, unsecured loan providers usually start with a small amount. The goal of this is that they want to see the type of lender that you are. If you pay on time, they will increase the limit. As such, building a good relationship with them will help lower your interests with time.
The unsecured loan industry has been on an upward trend. It has been supported by the low interest rates that we are in. The industry has seen the launch of other successful peer to peer lending platforms like Lending Club and Prosper. It has also led to the starting of many online lending companies like SoFi. Having a good understanding of how they work will help you avoid mistakes.