What are Unsecured Loans and How Do They Work?
Unsecured loans are loans that don’t require collateral, such as a car or home, for approval. Instead, a lender considers a borrower’s credit history and ability to repay to approve a loan. Common types of unsecured loans are payday loans, personal loans, installment loans, and lines of credit.
How do unsecured loans work?
When considering applications for unsecured loans, lenders evaluate a person’s credit history, income, and debts to determine their ability to repay the loan. These creditworthiness factors can also help lenders set loan terms, such as interest rates and repayment periods.
Pros and cons of unsecured loans
Here are some pros of unsecured loans:
Easy application process
Unsecured loans typically have a quick and easy application process. Depending on the lender, you can apply in-store or online from the comfort of your home.
Get funds quickly
The approval process for an unsecured loan is quick, and many lenders will give you a decision within 24 hours. If you get approved, you might be able to receive the funds in your bank account the same day you apply.
Since unsecured loans do not require you to provide property or an asset as collateral, you don’t have to worry about losing your house or car if you can’t pay off the loan.
Here are some cons of unsecured loans:
Higher interest rates
Because unsecured loans are riskier for lenders than secured loans, they usually come with higher interest rates. The rates that you will qualify for depend on your credit score and how much you want to borrow.
You may get a smaller loan amount
Since there is no guarantee that a borrower will repay an unsecured loan, many lenders will take steps to reduce the risk of borrower default, such as limiting the money they lend out. If you have a lower credit score or bad payment history, you may only be able to get a small amount of money from an unsecured loan.
Unsecured loans vs. secured loans
Unsecured loans differ from secured loans in a few key ways.
Unlike a secured loan, an unsecured loan does not require any collateral, such as your car or house. If you default on an unsecured loan, your lender does not have the right to take your property away. However, your credit score may decrease and you might be prevented from accessing future loan options.
Get cash faster
You can get cash faster with an unsecured loan than with a secured loan. This is because applying for an unsecured loan doesn't require additional documents or paperwork, such as a car title or home mortgage.
Higher interest rates
Unsecured loans tend to have higher interest rates than secured loans because they are riskier for lenders. If you have an excellent credit score, however, you might be able to qualify for low interest rates on unsecured loans.
Higher qualification levels
Since you need to have good credit standing and do not need to provide collateral, it can be harder to earn approval for an unsecured loan.
How to qualify for an unsecured loan
Here are some of the factors that will improve your chances of getting approved for an unsecured loan.
If you have an excellent credit score, you may get approved for an unsecured loan with very low interest rates. Those with poor credit or bad credit can still get approved for an unsecured loan, but it will likely come with higher interest rates and less favorable terms.
Income and debt
Lenders will consider your monthly income and debt to determine whether or not you will be able to pay back a loan. If you have a high debt-to-income ratio, you may not get approved for an unsecured loan.
Lenders check your bank account status to understand how the loan payments would fit in with your budget.
How to apply for an unsecured loan
- Find the right loan for you
Compare unsecured loans and choose the loan that will be more beneficial for your financial situation. If you need some extra money before your next paycheck, for instance, then a payday loan may be your best option.
- Gather necessary documents
Make sure you have all necessary documents and information with you before you start your application, whether you apply online or in-store. You may need to provide bank statements, proof of income, an official photo ID, and your social security number, among other forms of documentation.
- Submit your application
If you are applying for an unsecured loan in-store, visit your lender’s store location in your state of residence to submit your application. If applying online, you can submit your application on your computer or mobile device.
- Get the funds you need
Many lenders have a quick decision process for unsecured loan applications, and you may get approved instantly. Once approved, the funds could be deposited into your bank account that same day or within a few business days, depending on the lender.
Advance America unsecured loan options
Advance America provides a range of unsecured loan options. You can apply for an unsecured loan with Advance America even if you don’t have good credit.
Payday loans are short-term unsecured loans that provide an advance on your next paycheck. Payday loans are typically paid back in two or four weeks, whenever your next paycheck arrives. Payday loans are helpful for covering daily finances or emergency expenses.
Installment loans are personal unsecured loans that can be paid back in small amounts over a long period of time, such as months or years. Installment loans are helpful for getting quick easy cash with a flexible repayment schedule.
Line of credit
Lines of credit provide an accessible pool of money to withdraw from at any time, up to a certain credit limit. You can pay the money back all at once or over time, and you only pay interest on the money you withdraw.