It is common knowledge that although unsecured personal loans are quick loans, it is hard to qualify for this type of loan. Lenders have a valid reason for this. Banks and lending institutions exposed themselves to greater risk when they release a loan that is not secured by a personal property.
The Risk of Unsecured Loans
Lack of security is the main risk banks and financial institutions exposed themselves with unsecured loans. Why is this so?
- The only guarantee they are holding on to is the borrower’s promise and commitment to pay.
- The borrower’s behavior is the lender’s main security.
- Suing the applicant for non-payment of the unsecured personal loan is a long and costly process.
- The details of the borrower’s monthly payslip are the main determinant to establish his the probability that he will not default on his payments for the duration of the term of the loan.
Stringent requirements need to be met before collateral free loans are released. Nothing to worry though, because the requirements are easy to comply with. As a matter of fact this type of loan is often referred to as online loans because application and submission of requirements can easily be done online.
Getting Approved For An Unsecured Loan
In applying for a personal loan without a collateral, your monthly income is one of the first thing lenders look into. The amount of your monthly amortization must not exceed 30 percent of your monthly income. Lenders have come to the conclusion that should your monthly amortization exceed 30 percent of your income, you will find it difficult to cope with the required payments.
If you are employed, you need to show your payslips for the last two years with the same employer. Working on the same field for the last two years is also acceptable. If you are a business owner or self-employed, you need to show your tax receipts.
Your credit score also has a high bearing in your loan application. It can be difficult to be approved for an unsecured loan with a bank or lending institution if you have bad credit. There are however some non-traditional lenders that offer loans to people with bad credit.
Types of Unsecured Loans
There are several types of loans with no collateral available. Each loan type comes with its own distinct features. Check them out to decide which loan you can take:
- Signature Loans. These are the basic types of loans without collateral. The only thing that secures this type of loan is the signature of the applicant. This type of loan is payable in fixed monthly amounts. If you have a good credit rating, interest rates can be generally low.
- Credit Cards. Credit cards offer cash advances which are standby loans available when needed. It is fast and easy to borrow through your credit card but the interest rates are high.
- Payday Loans. Payday loans are also called payday cash advances. These are unsecured and short term loans granted given based on your income. You can amortize a payday loan but usually a lump sum payment is required.
- Peer to Peer Loans. These are loans acquired from individuals and not from banks.
With almost all types of personal loans you can acquire, your source of income and credit rating are two of the most important things lenders look into.
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