There are different types of unsecured loans, and the simplest of them is a loan from a family member or friend. It is important to take such loans seriously, whether you are the lender or borrower. If you are unable to pay back the amount borrowed, this can put a strain on your relationship. Another type of unsecured debt is making purchases on a credit card. Persons who use a credit card to make payments sign a form that authorizes them. The form is actually an agreement to repay the sum borrowed. The terms and conditions and the size of the loan are agreed before signing the cardholder agreement.. Credit card companies do not require that cardholders offer some asset against the loan. If the loan is not paid on time, the credit card company may assess additional fees, start legal proceedings, or send the account to collections.
Borrowers may choose to declare bankruptcy if they are unable to keep up with payments due to loss of job and significant reduction of income. Most of the time, credit card companies cannot demand that persons who have been made bankrupt sell any assets they own. Claiming bankruptcy, however, is a very serious step and can damage the borrower?s credit rating. Moreover, financial establishments consider such borrowers high risk and are less likely to approve their loan applications.
Commercial paper is another unsecured loan to consider. It is a short-term, unsecured debt instrument used to finance inventories and accounts receivable and to meet short-term liabilities. It is usually large banks, corporations, and other entities that use commercial paper to meet their obligations. Given that collateral is not required, only businesses with excellent and very good credit get a good price when selling commercial paper. Commercial paper often carries a higher interest rate compared to bonds. The interest rate is determined by the term, and interest rates fluctuate but are usually lower than what banks offer.
Banks also offer unsecured loans to borrowers. Financial establishments pay attention to the creditworthiness and integrity of applications as to determine the amount and type of loan they can offer. Borrowers with bad credit are less likely to obtain an unsecured loan. Even if they are offered an unsecured loan, lenders are likely to assess a high interest rate. This is because the financial institution takes more risk.
Regardless of the type of unsecured loan, it is usually a small amount of money. The money can be used to pay bills, go on vacation, buy textbooks, etc. Borrowers can use the money for home repairs or renovation (e.g. remodeling the kitchen), to consolidate high-interest debt, start a small business, etc. Interest is not tax deductible meaning that there are no tax benefits for borrowers. Another disadvantage is that the interest rate on an unsecured loan can easily be 10 percent or more. Borrowers pay more in interest charges than on home equity loans.
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