Bad Credit - Unsecured

Bad Credit Unsecured Loan
Unsecured Bad Credit Loan

Any person who is trying to get a loan; especially a bad credit loan, needs to understand the difference between a secured and an unsecured loan.

A secured loan is a line of credit that is guaranteed by a piece of collateral that the lender has a legal right to seize and sell if the loan is not paid. Two common examples of secured loans are mortgages in which a piece of real estate is the collateral and auto loans in which the vehicle is the collateral. Another kind of secured lender is the pawnshop which holds a piece of a borrower’s property in exchange for a loan.

What is an unsecured loan?

An unsecured loan is a loan with no collateral that can be seized if the loan is not repaid. Unsecured loans are usually based upon a person’s credit record (a person who has no history of unpaid debt is more likely to get a loan) or on the prospect of future income. A cash advance or payday loan is a loan issued in the anticipation that a person will receive a payment they can use to pay the loan off in the near future is an example of such a loan.

Tougher to get an unsecured bad credit loan

Getting an unsecured bad credit loan is always tougher than getting a secured loan because there is no collateral to guarantee the loan with. Many lenders will not give unsecured loans to people with bad credit because the chance of such loans not being paid off is higher. Others will lend to people with bad credit but they’ll charge higher interest rates.

Unsecured bad credit loan in the form of a cash advance loan

Cash advances are a very common type of loan that are made to people with bad credit. A cash advance is a direct cash loan that a lender expects to get paid off quickly, for example a loan issued to a worker a few days or a week before his payday. The lender expects that the worker will pay the loan off using his paycheck. Cash advances are considered an unsecured loan because no collateral is involved.

Advantages and disadvantages

There are advantages and disadvantages to both secured and unsecured loans for people with bad credit. Secured loans such as those from the pawn shop are easier to get and involve less paperwork. Many of the items pawned are things a person doesn’t need everyday such as guns or jewelry. One big advantage to secured loans is that there is no paper trail that will come back to haunt you if you can’t pay it off. The pawnbroker will simply take the item you put up in collateral and pawn it.

A disadvantage to secured loans is that you have to have something valuable enough to pawn. Another disadvantage is that the amount of money loaned is limited to about half the valuable of the item. The pawnbroker does this so he or she can make a profit by selling the item off. Another problem with these loans is that you might loose your possessions if you can’t pay them off.

The advantage to unsecured bad credit loans is that you don’t need to put up your possessions as collateral. The disadvantage is that lenders usually charge those with bad credit a much higher interest rate. Another disadvantage is that you will probably eventually have to pay such loans off.

A person with bad credit will have to decide if they want to take out a secured or unsecured loan. Since everybody’s situation is different, everybody will have to make their own decision on this matter.