What are unsecured loans?
These are loans that are obtained without the use of property as collateral for the loan. Borrowers must generally have high credit ratings to be approved for these loans. These loans also generally have high interest rates, as they are often considered a bigger risk for lenders.
The loan is issued and supported by the borrower’s creditworthiness.
Examples of unsecured loans include credit cards, student loans and personal loans.
How unsecured loans work:
If a borrower defaults on an unsecured loan, the lender cannot claim property, so they are more likely to charge higher interest instead.
There is often a misperception that unsecured loans are bad. But the truth is that when managed efficiently, they can be highly effective. As a borrower, you make regular payments until the loan is repaid in full. If you default, this will damage your credit rating, making it harder for you to get access to credit in future.
It’s important to make sure that you research the cost of borrowing when you are considering applying for unsecured loans.
Applying for unsecured loans means that your credit record will be assessed during the loan application process. It will be a factor considered by lending institutions and they won’t just rely on affordability.
One of the major benefits of getting unsecured loans is that they can be used for anything. In South Africa, research has shown that unsecured loans are mostly used to cover an unexpected expense.
When applying for unsecured loans, it’s important to make sure that the lending institution is registered with the National Credit Regulator and is compliant with the National Credit Act. This will ensure that the lending institution never lends you an amount that you can’t afford to repay.
Lenders don’t require any upfront fees to be paid, but they will charge interest for the loan.