It might seem that lenders who approve unsecured personal loans with bad credit are taking on an unnecessary risk. It does not seem such a risk when a bad credit borrower offers up some collateral to provide some compensation in the event the defaults on the loan. But with no collateral, it seems almost foolish.
But they are not taking quite the risk we think, and profits are will be made anyway. In the meantime, bad credit borrowers can get loan approval with no collateral and have an accessible route back to financial recovery. What is more, they do not have a valuable item of property at risk either.
Still, there are conditions and criteria that all applicants face when taking on an unsecured personal loan. Not least are the costly compromises that must be accepted.
Why Collateral is Important
Normally, having a low credit score means lenders are cautious about granting loan approval. The reason is the perceived risk involved in granting cash to someone with a less than reliable credit history. But collateral can lessen the risk, and so help get an unsecured personal loan with bad credit.
The problem for many people, however, is finding something that can be used as collateral. Property like cars, family jewelry and even home equity are common forms, but whatever is used must match the sum borrowed. If $10,000 is needed, something worth $10,000 must be offered up.
Of course, approval with no collateral is possible on a $10,000 loan, but the terms are likely to be poor, with higher interest rate and strict penalties. The largest unsecured personal loan available is around $25,000, though this depends on the lender.
How No Collateral Loans Work
But how can lenders afford to take such risks anyway? Well, it is all to do with their terms, and a little bit of psychology. The reality is that most bad credit borrowers do not want to stay bad credit borrowers, so are more intent than other borrowers to make repayments on time. So, granting an unsecured personal loan with bad credit is not as big a risk as it first seems.
The biggest problem for borrowers is affordability, and lenders know if they make the loan affordable, they will have fewer late repayments and fewer defaults. This is provided by extending the term of the loan, perhaps from 5 years to 10 years, or 10 to 20 years, depending on the size. Granting approval with no collateral is, therefore, plausible.
However, higher interest rates do mean that profits are generally made. And on longer terms, the amount paid in interest becomes very high. So, lenders know exactly what they are doing when approving unsecured personal loans, but without the benefit of collateral.
Loan Options Available
The Internet has changed the way lenders and applicants operate. Finding loan options is now a simple matter of searching the offers online, and the best terms are usually available there too. And finding affordable unsecured personal loans with bad credit is even easier with comparison sites.
What is more, Internet applications mean that approval can be secured within minutes rather than hours, and funds received directly into the bank account of the borrower within a few hours rather than a day or two. Even approval with no collateral is simpler, though the type of loan and size of the loan may have an influence.
For example, the most commonly approved is a payday loan, which is granted on the back of an upcoming paycheck. But the loan limit is small, at just $1,500, making it fine to deal with financial emergencies but not to clear debts. What is more, these unsecured personal loans come at high interest (35%) and short terms (14 days).