Characteristics of Unsecured Lån (Loan): The only way you can build your credit score is by taking out loans and paying them on time. Loans come in handy when we are short of cash or need to do a project that needs a good amount of money.
There are two main types. These are secured which have a collateral and Lån uten sikkerhet which are the most common because of their features. Unsecured loan caters for personal costs like vacation, emergencies, education, medical bills, and more.
Many people prefer unsecured over secured loans because they have features that favor an individual. There is therefore a need to discuss features of unsecured loans.
- No collateral
This is the feature that attracts many people. When taking out a personal loan, there is no collateral needed at all. It is not like those situations where you see an individual give out their logbook, title deed, or home as an asset until they clear a debt.
Here, in a case where one is unable to pay off their debt, a lender cannot seize any of their valuable properties. They have absolutely no authority to do that. However, they can report you to credit bureaus or send your payment details to collections.
If you make no effort to do repayments, they can also choose to sue you since they have no legal access to confiscate your possessions. The same cannot be said about secured debts because any little delay or lack of payment and they immediately come to confiscate your assets whether it is your home or vehicle.
- Interest rates
Their interest rates are cost-effective. Before qualifying for a loan, lenders must first check your credit history to see if you have issues paying back debts. When calculating interest rates they evaluate using an individual’s credit score and credit history.
Individuals with low credit scores are most likely to have small interest rates. This is cost-effective because one does not need to pay an insanely high interest rate for a small amount of debt. Compared to other types, unsecured has very fordable rates. Read more here https://www.forbes.com/advisor/in/loans/14-things-to-know-before-taking-an-unsecured-personal-loan/
With this type, nobody controls how you spend or use your money. Once you are given the money, it is up to you to use it however way you want. If you do not want to spend the money immediately nobody will force you to.
All this is because your interest rate is calculated after an evaluation of your credit score has been done. However, note that debt consolidation has a more higher interest rate even though it is unsecured.
With secured, you have to spend the money wisely so that it brings profit. Most people invest with it so that they are able to use profits to pay it back. Since secured has collateral, one might risk losing their assets should they misuse the money.
- Credit report
Your lenders always record loans that you take for personal use on your credit report. This should encourage an individual to always pay their debts on time so that it positively impacts on their credit report.
Working towards having a good credit score and history is important because it increases one’s chance of getting a bigger loan. It also opens doors for other lenders to trust you and lend you when need be.
Ensure you pay off all installment debts and any other debts including those from credit cards because they are all reflected on your credit report.
- Short payment term
Personal unsecured loans are usually in small amounts hence why their payment period is relatively short as well. The payment term maybe fixed or unfixed depending on the purpose of the loan and agreement with a lender.
The payment period is normally divided in monthly installments. Although credit cards are unsecured, their payment period is unfixed because the interest rate and monthly installments are revolving. This means that it changes from month to month.
A signature loan is one with fixed payment terms meaning that one has to deposit installments on the agreed dates without any delays. On the other hands, those taking secured debts have a longer payment period because it is usually a hefty debt.
Most of secured debts are equal to the value of a car or a good home hence why the long payment period.
- Lower loan amount
Unsecured loans are usually low in amount because they are used for personal unexpected bills. They are mostly a small amount that one can easily clear off in a short duration.
Examples of these unexpected expenses are funeral costs, car breakdowns, medical costs, and vacation costs, to mention a few. These are usually spendings that are unplanned for and majority of the population cannot afford to save for such situations.
Although it is a small amount, one has to ensure it does not heavily impact on their overall budget to avoid financial constraints.
The biggest flex of an unsecured loan is that it is multi-purpose. An individual could use it to do anything they like. One may apply for it to use it to pay off already existing debts of higher interests.
However, keep in mind that the lender charges a higher interest rate for debt consolidation. You can also use for home renovations or upgrades.
You do not have to wait a lifetime for you to buy appliances such as a refrigerator or washing machine yet you can buy them in debt that is settled in installments. Use it to cater for emergency medical bills or car repairs that were unplanned for. Click here for some more tips.
Another good characteristic of unsecured debts is that it is open for salaried and self-employed professionals. It is not limited to salaried people only. Another key factor is that unlike secured, it is not tax deductible. The interest rate cannot be deducted from one’s income tax.
In as much as the amounts is usually low, it is advisable to avoid getting into debts unless you have exhausted any other option available. Do not get into debts unless it is necessary. Make repayments on time to build a good credit score and debt history