Unsecured Bank Loan
An unsecured bank loan can be of great help to someone with good credit who needs cash for various reasons. These lending agreements can be offered to both individuals or to businesses, usually small businesses. But an unsecured bank loan can also become one of the most difficult lending agreements to secure for two reasons. First, the lending agreement is an unsecured type of borrowing instrument which means that there is no collateral being offered in case of default. This leaves the lender in a very precarious position with no leverage and one of the last in line to ever receive payback in the event of the debtor declaring bankruptcy. Second, the lending agreement is be offered by a banking institution, the most conservative of all the loaning entities when it comes to offering lines of credit.
Of all the places to get an unsecured lending agreement, a banking institution offers the lowest priced money a person can ever borrow. There are two main reasons for this truism. First the banking institution, unless privately owned, must answer to stockholders for quarterly profits earnings. Except in the case of a few banks who have been guilty of malfeasance when it comes to issuing risky mortgages for promises of high returns, most stockholders want to know their investment is dealing with low risk borrowers and are willing to take lower returns on their investments rather than take a chance on a high number of defaulted notes. Secondly, a banking institution is responsible for the well being of its depositors' monies. Unlike a lending company who has investors willing to take high risks for high profits, a banking institution realizes an obligation to its customers for the relative safety of their deposits.
So an unsecured bank loan, a relatively high risk transaction, is only offered to creditors with sterling borrowing histories and low debt to income ratios. For the borrowers with those characteristics, the unsecured bank loan decision can be rather sweet. For instance, credit rates for banks who offer these lending agreements can be as low as nine percent. Of course, the interest rates for this kind of lending agreement are variable in nature and not fixed. That means that the payments could possibly go up as economic times often fluctuate. They are sweet because lending companies which open their arms to those with marred credit histories charge as much as twenty eight to thirty percent APR for an unsecured bank loan.
But getting an unsecured bank loan must also come as the result of passing a debt to income ratio scrutinizing process. Having a stellar borrowing history is not enough for the potential borrower. In addition, the borrower must not have too much debt in relation to his income. Even if the borrower has made all debt payments on time, the fact that more than thirty five to forty percent of income is dedicated to debt repayment will be enough to sink the bid to obtain an unsecure bank loan. The Bible declares that financial success in life is not the ultimate achievement for Christians. "For we know that if our earthly house of this tabernacle were dissolved we have a building of God, an house not made with hands, eternal in the heavens." (II Corinthians 5:1)
When a small business seeks an unsecured bank loan, it can be for a number of reasons. For example working lines of credit for the cash needs of small businesses is an unsecured lending need. A banking institution can issue a credit card which is a high interest line of credit. Banks can also issue short commercial loans for one to three years. In all of these cases, the bank is relying on the integrity and signature of the borrower to repay the lending agreement. But to have any of these lending agreements become a reality it is important for the borrower to have done his homework and know his credit score and debt to income ratio before heading to the bank and talking to a loan officer. If a person has no collateral to offer because of high indebtedness, it might be a sign that the borrower should drop the idea of another loan on top of all the others.
But if a person is resolute in securing a lending agreement , there are alternatives to an unsecured bank loan. For example, loan companies are willing to overlook a fair amount of late payments and forty percent or more of debt to income. These lending companies are best found online or even at a local strip mall and often have nationally known names that have been in business for many years. The interest rates will be much higher than a no collateral bank lending agreement would ever be. There may also be some points involved in the agreement. A point represents one percent of the total amount of the lending agreement and if the borrower cannot pay these costs upfront, they are often rolled into the total amount of the loan.
Having made good money decisions earlier in life is key to getting a no collateral lending agreement with a banking institution. Banks are eager to loan money to those who have proven to handle credit in a responsible manner. The beginning of anyone proving credit worthiness is paying off a credit card every month and not carrying a balance, or perhaps making timely payments of a car loan. Making right choices early can save thousands and perhaps tens of thousands of dollars of interest over a lifetime. Just a one percent difference in a good mortgage rate is a huge payoff for earlier fiscal restraint.
Unsecured Credit LoanThe major difference between an unsecured credit loan and secured credit loan is the use of collateral. Secured financing is based on collateral, a tangible asset that lowers the risk for the lender. Two common examples of secured financing are home mortgages and automobile financing. When house payments are missed, the mortgage holder may begin foreclosure proceedings against the homeowners. When car payments are missed, the financing company may repossess the vehicle. With the ability to reclaim tangible assets like these, the lender has the opportunity to recoup at least a percentage of the borrowed funds. Additionally, most people have a strong aversion to having their homes sold out from under them or having their vehicles repossessed. Therefore, borrowers have a powerful incentive to keep up with the monthly payments. An unsecured credit loan is not based on collateral, but on information that the prospective borrower enters on the lending institution's application.
Two other differences between a secured and unsecured credit loan are the lender's level of risk and the interest rate that the lender will charge the borrower. In the financing industry, these two factors correlate to one another and to the use or non-use of collateral. Obviously, the lack of collateral increases the risk for the lender that the borrowed money may not be repaid. Should the borrower miss payments, the unsecured lender doesn't have a house to foreclose on or a vehicle to repossess. Instead, the lender has to resort to threatening letters and phone calls, turning the account over to a collection agency, and/or getting assistance through court system. There are laws that creditors must observe when trying to collect on an unpaid debt. Consumers who are receiving calls and letters from creditors or collection agencies are advised to familiarize themselves with the provisions of the Fair Debt Collection Practices Act. Because of the increased risk of not having collateral to secure the debt, the interest rate on an unsecured credit loan will almost always be higher than the interest rate on an "all other factors being equal" secured loan. A higher interest rate equates to higher monthly payments to repay the debt. However, the monthly payment can be reduced by lengthening the number of months that the funds need to be repaid.
An unsecured credit loan is sometimes known as a signature loan because it is based on the strength of the applicant's signature -- in other words, her reputation for meeting monthly obligations. A credit card account can also be considered as a type of unsecured financing. These are common types of loans in many households. However, there is another type of unsecured financing that can quickly spiral out-of-control even for financially-conscientious people. More commonly known as payday advance loans, these lenders charge fees that calculate to extremely high annual percentage rates. The Bible warns against charging high interest rates to people in need in this verse: "He that by usury and unjust gain increaseth his substance, he shall gather it for him that will pity the poor" (Proverbs 28:8). Though such a harsh admonition isn't given for those who pay usurious rates, it's unwise to get caught up in a financing situation with a high APR. In recent years, legislation has been passed in many states to limit the amount of interest that a payday lender can charge. However, borrowers should still beware of borrowing money through a payday advance company. This type of unsecured credit loan should only be used as a last resort.
In general, financial institutions require less paperwork and documentation on unsecured loans than they do on secured financing. Anyone who has filled out an application for a credit card knows how short the application is and how quickly it can be approved. But applying for a home mortgage, home equity line of credit, automobile financing, or another type of secured loan can mean providing all kinds of paperwork to the lender. For this reason, sometimes it is quicker and more convenient to apply for an unsecured credit loan than to go through the hassle of making copies of income tax statements, pay stubs, and other required documentation. However, for the vast majority of people, the highest amount that can be borrowed through unsecured financing will only be a few thousand dollars. People with poor credit histories may qualify for loans amounting to only a few hundred dollars.
Financial institutions will have differing criteria for determining whether or not to approve a prospective borrower's application. Whether or not the applicant is applying for a secured or unsecured credit loan, one important factor will be the applicant's FICO score. A higher score reflects a history of meeting financial obligations as well as residential and employment stability. An applicant with a higher FICO score will most likely be able to obtain financing with more favorable interest rates than someone with a lower score. In addition, the higher score may qualify the applicant to borrow more money than someone with a lower score. Individuals are advised to obtain their FICO scores and copies of credit reports before applying for any type of financing. A free report can be obtained from each of the three major credit reporting agencies once a year. Consumers are advised by financial experts to obtain the free reports on a regular basis so that the reports can be reviewed for accuracy. There will almost always be a small fee to obtain the FICO score, but it is worth the small price to have this information before applying for financing.
Unsecured Hard Money LoanWhen ample credit isn't available, an unsecured hard money loan may be a potential borrower's best bet at purchasing an expensive item that is above their current cash flow capabilities. This is especially true if the borrower has a low credit score, a marred credit history or a current delinquency on his or her record. An unsecured hard money loan, or a bridge loan without collateral, differs from other bridge loans in that the money from the lender is not secured by a piece of property. This will often allow the secured bridge loans to offer more competitive interest rates than the bridge loans with no property as collateral, however if a borrower needs the money this type of financing is available to her and allows her to make necessary payments or purchases.
Typically, bridge loans require a personal residence or commercial property to act as collateral should the borrower default on the payments. This property is assessed to determine the amount of financing available to the potential borrower. However, in the case of an unsecured hard money loan, other factors are considered in offering financing options to the borrower. The appeal of bridge loans, whether collateralized with a home or secured by some other process, is that an individual with poor credit or a questionable financial history still has a way to get cash in the case of an unexpected medical emergency, sizable car repair or other unforeseen expense. If someone has a recent bankruptcy, the chances of getting financed through a standard lender are slim to none. With the opportunity to apply for an unsecured hard money loan, the unexpected financial event does not have to threaten the individual's entire future.
The application fee for an unsecured hard money loan is usually more expensive than applying for a loan at a standard lending institution. There are many reasons for this disparity between fees. Because bad credit lending companies deal primarily with individuals who habitually do not make loan payments or are well below the poverty level, their liability and possibility of financial loss is much greater than a standard bank or credit union. To pad their budget against these inevitable blows, the bridge lending professional will charge a nonrefundable fee for applying for a line of credit with his or her institution. This application for a hard money loan will not include some of the specifics seen in standard financing applications from a bank or credit union. Bridge lenders do not typically run a credit report, because the credit score has no bearing on the financing likelihood. The application will require proof of income in the form of check stubs or banking statements. If the bridge loan is secured by the property put up for collateral, then verification of income may not be necessary. However, if the loan is collateralized by a car or on the anticipation of a pay check, then income verification or proof of ownership is definitely going to be required.
If the unsecured hard money financial package is made with the anticipation of a pay check, then the financing will not exceed the amount of the coming pay check or the amount of the monthly salary of the borrower. The advantage of this type of loan is not just that it negates the need for pristine credit, but also bypasses some of the time consuming regulations that banks have to follow. Typically, a bank financing package can take up to a month to complete, longer if it is to buy a home. An unsecured hard money loan can be processed in 24 hours. If the borrower has direct deposit or Internet banking set up on their checking account, the money could be deposited directly the same day as approval. This is so helpful if the borrower is waiting to get their car from the mechanic or has had his or her water, electricity or gas turned off in their home. "And it shall be, as with the people, so with the priest; as with the servant, so with his master; as with the maid, so with her mistress; as with the buyer, so with the seller; as with the lender, so with the borrower; as with the taker of usury, so with the giver of usury to him." (Isaiah 24:2)
The income tax paper work from a borrower indicating a tax return can also be offered as "collateral" for an unsecured hard money loan. The financing is still considered unsecure, because the potential income tax return, though verifiable and for sure, is still not in the hands of the borrower at the time of the lending agreement. The borrower is asked to sign an enforceable contract bestowing the return to the lender upon filing and processing. Emergencies do not wait for the IRS to send the check. For this reason, these types of lending packages are ideal for individuals who just need to buy a little more time. The amount loaned does not exceed the amount of the income tax return, and usually includes the fee assessed for processing the application. These types of loans are getting fewer and fewer in recent years, now that the Internal Revenue Service offers electronic filing and automatic deposits of income tax returns.
With unsecured hard money loan comes higher interest rates than those offered by standard lending institutions. There are many reasons for this. The increased risk of default drives the need for higher interest rates. At the end of the day, the bad credit lending company is in business to make a profit. There are no profits in loaning money to people who don't pay it back. Increasing the interest rate can compensate for financial loss resulting from individuals who fail to pay back their loans.