Understanding Types Of Unsecured Loans To Consider | Simple ...

There are different types of unsecured loans, and the simplest of them is a loan from a family member or friend. It is important to take such loans seriously, whether you are the lender or borrower. If you are unable to pay back the amount borrowed, this can put a strain on your relationship. Another type of unsecured loan is charging purchases to a credit card. Every time cardholders use a credit card, they sign a form authorizing the payment. The form is actually an agreement to repay the sum borrowed. The size and term of the loan are agreed at the time when the cardholder obtains a credit card. Cardholders are not required to pledge some asset as collateral, such as a car or real estate. If the loan is not paid on time, the credit card company may assess additional fees, start legal proceedings, or send the account to collections.

Borrowers may choose to declare bankruptcy if they are unable to keep up with payments due to loss of job and significant reduction of income. Most of the time, credit card companies cannot demand that persons who have been made bankrupt sell any assets they own. Claiming bankruptcy, however, is a very serious step and can damage the borrower?s credit rating. Moreover, financial establishments consider such borrowers high risk and are less likely to approve their loan applications.

Commercial paper is another unsecured loan to consider. It is used to meet short-term liabilities and finance accounts receivable or inventories over a short period of time. Commercial paper is typically issued by corporations and large banks to meet their short-term obligations. Since commercial paper is not secured by collateral, only companies with excellent credit manage to sell commercial paper at a good price. Commercial paper often carries a higher interest rate compared to bonds. The interest rate is determined by the term, and interest rates fluctuate but are usually lower than what banks offer.

Banks also offer unsecured business loans to borrowers. To determine the type and size of the loan, financial institutions assess the creditworthiness of applicants. Borrowers with bad credit are less likely to obtain an unsecured loan. Even if their loan application is approved, they are likely to get a higher interest rate. The reason is that they are viewed as high risk by financial establishments.

Regardless of the type of unsecured loan, it is usually a small amount of money. Unsecured loans are used for different purposes, for example, going on vacation or paying a medical fee. Borrowers can use the money for home repairs or renovation (e.g. remodeling the kitchen), to consolidate high-interest debt, start a small business, etc. Interest is not tax deductible meaning that there are no tax benefits for borrowers. Another drawback is that the interest rate is higher than on other types of loans. Thus, borrowers end up paying a lot in interest compared to home equity loans of similar size.

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Source: http://simplesolutionweb.com/money/understanding-types-of-unsecured-loans-to-consider

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