Unsecured personal loans are loans that do not require any collateral and are provide for any expense that an individual wants to meet. It is not needed to prove the expenditure. These loans are solely dependent on a person’s credit score. An unsecure loan carries much less risk to the borrower and hence financial institutions do a number for verifications before granting a personal loan. However if an unsecured loan is obtained from an informal source like a friend or local money lender then credit scores are not in the picture.
Since unsecured personal loans are not backed by any asset or object of value it is very difficult for the lender to recover the money if the borrower defaults his payments. Therefore these loans have more strict underwriting rules. Financial Institutions like banks and credit unions perform detail checks on the borrower before granting these loans. Credit Scores are definitely referred. Apart from that a person’s credit history and his past track record of repayment of loans are checked. Depending on the findings the lender decides on whether to accept or decline the loan application. Also the risk involved determines the interest rate that will be levied on the borrower.
Presently with the advent of online lending companies even people with bad credit rating may get an unsecured personal loan. Though there is a minimum credit score required but it is far lower than that required by traditional financial institutions. These online lenders promise guaranteed approval and quick processing. They also give the option of flexible repayments. Increased competition has also led to reduction of interest rates to a great extent but still personal loans continue to be more expensive than other loans that are granted for specific objectives, for example car loans , home loans, business loans etc. But these unsecured personal loans are very handy if the money is required for some other personal need.