Line of Credit

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Line of Credit
Unsecured Line of Credit

An unsecured line of credit is a line of credit that doesn’t require a borrower to put up collateral as security.

In a secured line of credit the borrower has to put up something of value as collateral. If the borrower doesn’t pay the line of credit the lender has the right to seize the collateral. In an unsecured line of credit no collateral is involved.

Most unsecured lines of credit are issued on the reputation or credit rating of the borrower. The lender advances a borrower a line of credit because the borrower has a reputation of paying off their debts. This makes the borrower a good risk so they are more likely to get a line of credit.

Generally, a borrower has to have a good or excellent credit rating and a verifiable line of income to get an unsecured line of credit. Lenders will also advance unsecured lines of credit to borrowers with high incomes.

Examples of Unsecured Lines of Credit

The most common unsecured line of credit is a credit card. Most credit cards are issued to individuals and businesses based on their credit ratings. The credit rating is supposed to be an assessment of the possible risk a borrower presents. Those with good credit ratings are considered good risks and those with bad credit are considered bad risks.

Those with bad credit are often able to get credit cards. Unfortunately those credit cards usually come with low lines of credit and high interest rates.

There are some unsecured lines of credit available from banks as well. A checking or business cash line of credit is made available to depositors that run a lot of money through their accounts. This line of credit will cover checks and payments that exceed the amount of money in the account.

A hard money or cash advance line of credit is a high interest unsecured line of credit. This line of credit is advanced on the expectation that the borrower will pay the lender back quickly with interest. Many cash line of credit lenders require a borrower to give the lender the right to take the payment out of their checking account via direct deposit. Most of the unsecured lines of credit available online are hard money lines of credit.

Unsecured Lines of Credit Interest Rates

Generally the interest rates on unsecured lines of credit will be much higher than those on secured lines of credit.

Lenders base interest rates on the risk that they take when they make an unsecured line of credit available. Those who are considered high risks such as those with bad credit or low incomes will pay a higher interest rate on an unsecured line of credit.

The interest rates on credit cards issued to consumers are often much higher than the interest rates charged on home equity lines of credit which are secured lines of credit. Interest rates on checking and business cash lines of credit can be as much as 12%.

Consumers should limit their use of unsecured lines of credit because of the high interest rates.