A little security is always a good thing, so when first-time borrowers hear the term unsecured loan, they tend to react negatively. What does it mean? Does an unsecured loan work against financial security? In a word, no. Let’s take a look at this important lending term and find out why it’s not as bad as it sounds.
What are unsecured loans?
You’re probably familiar with the term collateral. This is something of value a borrower gives to a lender to hold during the term of the loan. Sometimes it’s the title to a car, or perhaps an expensive piece of jewelry. As long as that item holds equal value to the amount of money loaned, it works as collateral. The lender then holds that item until the loan is fully repaid.
Though the most common types of collateral are homes, cars, and jewelry, people have used all kinds of items for collateral. Bitcoins, lottery tickets, and livestock have all been handed over to banks and lenders. An Italian bank even accepts wheels of Parmesan cheese, since they’re valued at thousands of dollars apiece.
Collateral is a type of insurance policy for the lender. It’s part of what the industry would call a secured loan. The loan amount is secured with the value of the collateral. If the borrower can’t repay the loan, the collateral becomes the property of the lender.
Unsecured loans, there’s a few.
This all might seem obvious, but we’re laying the groundwork for why the industry often opts for unsecured loans. The name sounds scary, but in the realm of personal loans, it’s the norm. At Helix, we offer unsecured installment personal loans, up to $4,000.
There are a few different types of unsecured loans you should be aware of:
- Revolving Loan: This is an “open” loan with a credit limit. You spend, repay, and repeat. The most common unsecured revolving loan is the credit card. Each time you make a purchase with your credit card, you take out a small loan, to be repaid the following month.
- Consolidation Loan: If you don’t repay your credit card on time, you may need one of these. The idea of a consolidation loan is to gather your high-interest debts together and pay them all off with the help of a bank or other lender. The lender assumes the debt from all these sources, and you pay it off in a single loan, hopefully with a lower interest rate
- Student Loan: Many lenders, including the federal government, offer student loans to help pay for college or university education. These are long-term loans with low interest rates, distributed with the intention that people who hold college degrees tend to make more money, and can repay their loans in due time.
- Term Loan: This is a loan of a fixed amount that the borrower pays off in regularly scheduled installments until the full amount is repaid. Principal, interest rates, and APR are agreed upon prior to borrowing. Helix personal loans are term loans.
The majority of our loan customers tend to be new borrowers. Though the average Helix customer has a steady job and a college education, they’re just getting started on their journey toward financial stability. While we counsel potential borrowers to only take out loans when they need to, we also understand that sometimes the money just needs to be there, and you may have exhausted all other options.
Without a credit history, it may seem like a secured loan is the only option for you. Especially knowing your credit score is usually the biggest factor in whether or not you’ll be approved for an unsecured loan. This leaves the door open for secured lenders to target sub-prime borrowers with the promise of quick, easy money.
Why secured loans don’t live up to the hype
Perhaps the most common type of secured loan, other than a home mortgage, is the title loan. You sign the title of your car over to a lender as collateral. If you’re unable to repay the loan, they keep your vehicle, usually auctioning it off for less than it’s even worth.
We advise against title loans. Not only do many title loan operations use hidden fees and confusing terms to make you pay more than you bargained for, if you hit a setback, you could lose your vehicle, which you probably need in order to get to work and earn money in the first place.
Another type of secured lender is the payday loan operation. Though their security doesn’t come in the form of physical collateral, like a car or an expensive watch, they do secure the value of your next paycheck. Using your employer’s payment history, they advance your next paycheck, then claim that actual payment for themselves.
These loans also tend to include high rates, hidden fees, and predatory terms that have trapped countless Americans over the years. Unable to repay the loan plus the interest and fees with their next paycheck, customers often borrow again from the same institution. Soon they’re caught in a cycle of debt, taking advance after advance, racking up far greater sums in fees and interest owed than the amount they originally borrowed. Obviously, we advise against borrowing from payday loan operations.
No matter what form a secured loan takes, it always carries one attribute: inflexibility. If you can’t repay on time, you lose your collateral.
A good alternative to a predatory loan
Thankfully, you don’t have to take these risks at all. Here at Helix, we help “sub-prime” borrowers every day, through unsecured personal loans. We assume that risk because we have seen that through wise planning, comprehensive budgeting, and clear, understandable terms, our loan customers are consistently able to repay their loans on time or ahead of schedule. They can even receive a healthy boost to their credit scores, as well.
Are there any benefits, then, to secured loans? The biggest is a lower interest rate. Since the lender isn’t assuming as much risk, it can offer a lower interest rate across the life of the loan. The other benefit is that if you fail to repay the loan, the lender simply keeps your collateral. Outstanding secured loans usually don’t go to a collection agency, and the courts are not involved.
Yet once again, an unsecured personal loan only becomes a risk if you don’t have a plan, and we’re happy to help you make one. Before you ever apply, with us or any other lender, we recommend that you start by making a monthly budget to determine how much you can afford to pay each month. We can use this number, along with your credit score and individual interest rate, to calculate how much money you can truly afford to borrow. From there, it’s just a matter of sticking to your budget.
Yes, the term sounds iffy, but unsecured loans are probably your best option when it comes to personal loans, and at Helix, we work to make those loans as accessible as possible, with clear terms, no hidden fees, and no penalties for early repayment. Apply with us today. The online application process takes just five minutes, and you’ll get a decision instantly. If approved, your money will arrive within one business day.
Best of all, you don’t have to send us any Parmesan cheese as collateral. Please don’t try it.