Everyone needs a little extra money at times. Whether it’s for a house remodeling, a wedding or a vacation, sometimes your twice-monthly paycheck just won’t cover it. But you know that you could pay back the money incrementally, and you start to think about taking out a loan. Unsecured personal loans are sometimes necessary to get the little extra money to cover expenses. With a little shopping around, unsecured personal loans can be obtained, although there may be a price.
In the past, unsecured personal loans were in the form of a loan taken out of the bank without collateral. These unsecured personal loans were done based on the person’s character or credit history, and were common in small towns where the bank manager knew the people who had accounts.
Basically, unsecured personal loans are loans where the borrower does not have to put up any collateral to secure the loan. The bank lends out unsecured personal loans on the basis of the borrower’s character or good borrowing record, and trusts that the borrower will repay in due time.
However, as small-town banks have been mostly bought out in the past years by big national or regional banks, blanket rules have been instituted that do not include lending money based on “character,” as with unsecured personal loans. The increasing rate of bankruptcies and defaults on mortgage payments have also made banks leery about handing out unsecured personal loans, because if the borrower does default, the bank cannot legally collect the amount of the loan without a collateral agreement. Total bankruptcy filings broke the 1.5 million yearly mark in 2002, and with the struggling economy, lending institutions are not as generous as in years past about unsecured personal loans. Because unsecured personal loans are riskier for the bank, the interest rate on the loan amount will be higher. A secured personal loan means that if you default on your loan payments or cannot pay back the money, the lending institution can seize your personal property and auction it off as substituted payment.
Currently, the number one source for unsecured personal loans is credit card companies. For most credit cards, you can withdraw cash up to the amount of your limit on the card. You will be charged interest starting on the day you withdrew, as opposed to paying interest after 31 days. Even though the loan is unsecured, the credit card company does have the legal power, if you default on payments for an extended amount of time, to authorize a collection agency to garnishee your wages or place a lien on your property equal to the amount owed. A bank also has the power to do so on most loans other than unsecured personal loans.
A popular place for unsecured personal loans is from online banks. The Internet offers a plethora of loan options, because online banks are tied to many different lenders. Bad credit unsecured personal loans will have a higher interest rate, because they are riskier for the provider. Your salary and credit history will determine the amount the lending institution decides to loan you in an unsecured personal loan.
By Virginia Zignego