The use of collateral is an issue for many people. Some do not own their home and just rent or lease their residencies. Others do not have sufficient equity in their home due to recent real estate market problems. In addition, some of the homeowners do not want to put their home at risk in uncertain economic times, since in case of a loan default a lender has the right to take possession of a property and sell it to recover the losses.
Therefore, secured lending is not an option for many people. That is why many lenders have unsecured lending options for all credit grades, including individuals with bad credit. Such lenders are willing to work with you regardless of your ability to post collateral.
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Unsecured Loans: Excellent Solution for Bad Credit
Unsecured loans, also called signature loans by lenders, as such only require a signature of the borrower to obtain, are a great answer to financing needs of many people. While they are great in many terms, including absence of collateral requirement, they do come with some downsides. The major drawback of unsecured loans, especially for people with bad credit, is high interest rates. Since having nothing to fall back on in case of default poses a higher risk to lenders, they typically offset it with inflated interest rates. Therefore, be prepared to see your APR on a loan agreement to be several points higher when compared to secured loans.
Loan Amounts Are Somewhat Restrictive, But Attractive
While amounts on unsecured loans differ widely from lender to lender, they are typically lower than what secured loans have to offer. This is especially true for people with bad credit, who rarely see their loan amounts exceed $10,000. Always check with potential lenders to see if they are available to accommodate your financing request, since some endorse restrictive ceilings on loan amounts. Typically, you should be able to qualify for loans ranging from $2,500 to $10,000, depending on your income, expenses, and credit history. It is highly advisable not to overextend yourself by borrowing more money than you can afford to repay. Since unsecured loans feature higher interest rates compared to secured loans, your monthly payments will be somewhat higher.
Qualifying Criteria Is Relaxed
Commonly, qualification criteria are very simple and straightforward. First, you have to satisfy your potential lender that you have ongoing means of loan repayment, such as a stable income that covers all your expenses and allows for covering monthly loan payments. Second, your credit score has to be at least 600, which is typically not a problem even for people with poor credit histories. While it is possible to get your loan funded with credit score lower than that, be prepared to face more restrictive terms and fewer offers from lenders. Third, you have to submit to lender all required documentation, most commonly consisting of proof of your identity, such as a State ID Card, proof of residency, such as a recent utility bill in your name, and proof of income: your recent paystubs and your tax returns from previous year. If you are self-employed or retired, your lender may ask you to provide more documents to prove your ability to pay.
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