With the financial landscape changing lately, it can be confusing to know how to manage debt if you need a loan. The choices of loans include both secured and unsecured loans, but knowing the difference between the two and the requirements for each can make a big difference to how much money you are able to borrow and the terms of the loan.
What are Unsecured Loans
Unsecured loans are what most people think of when they consider taking a loan from a bank. These are loans that are made available to you without having to post any collateral to back up the loan. In other words, the loan is offered to you based on other requirements.
Often, credit cards are an example of unsecured loans. You do not need to dedicate any assets in order to receive the credit. Instead, you are offered use of the credit card and expected to make regular payments to pay the loan obligation off when it is due.
For people with excellent credit, this is generally the loan of choice.
What are Secured Loans
Secured loans are loans that require you to post an asset as collateral in order to be extended credit. Secured loans are easier to receive because the lender is taking on less liability and risk with a secured loan. If you default and do not pay the loan back, then the collateral is defaulted to the creditor and is lost. In today’s financial world, many people with bad credit are finding that secured loans and secured credit cards are the only type of loans that are available to them until they improve their credit rating.
What are the Requirements for Unsecured Loans?
First and foremost, lenders require you to have excellent credit. Gone are the days when average or good credit would give you access to good interest rates and automatic credit. Today, most lenders look for a credit rate of at least 700 and, more often, higher than 750, for unsecured loans.
Other requirements include having steady employment and income history. You must be able to provide proof of income in the form of employment paycheck stubs, payment receipts or income tax returns.
Additionally, some lenders also look at your residential history. If you have a history of moving too frequently, you may find it difficult to get unsecured loans.
Lenders also look for steady financial history as a requirement for this type of loan. They may require you to have a savings and/or checking account with a stable financial institution.
Requirements for Secured Loans
Secured loans, on the other hand, have relatively easy loan qualifications. The lender usually does not require you to have excellent credit. They may require you to have a bank account and employment history and be able to prove you income.
The most stringent requirement is usually that you be able to post collateral against the loan. For secured credit cards, for example, you will be required to open a bank account with the financial institution in a set amount. This account is fully functional as a bank account and you will earn interest if applicable. However, you will not have access to the money in the account, since it will be held to be applied to your loan if you default and do not make agreed-upon payments. Often, secured credit card accounts will become unsecured accounts within a specific time period after you open the account and prove yourself credit worthy.
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