Unsecured Loans: what they are and their characteristics

When it comes to seeking financing, one of the biggest barriers is having to present a guarantee that supports us. This is one of the most important and widespread requirements in most loans, but not all. The unsecured loan is an option to take into account for those who, contrary to what can be expected in most financial products, do not have a specific guarantee.

In this publication we will focus on explaining what unsecured loans are and what their main characteristics are, an attractive option for those without assets to use as collateral. Continue reading and find out why they could be the alternative you were looking for.

What are unsecured loans?

Unsecured loans are a type of loan that is based on trust in the  borrower . Rather than seeking specific collateral, the borrower signs a promissory agreement to repay the loan and associated interest within a specified period. In exchange, the financial company responds to its need for short-term liquidity. This occurs when there is a very good credit rating and a stable source of income, since if this does not happen, there may be credit.

Characteristics of unsecured loans

Clients can request this type of loan to address a multitude of situations, such as reforming a property or to carry out a future project. In the case of companies, these loans are useful to increase capital or purchase inputs quickly.

The main characteristics of unsecured loans are the following:

They do not require a specific guarantee

As mentioned above, these types of loans do not need to present an asset as collateral to back them, but, nevertheless, they do require the figure of a guarantor. In the event of non-payment, this person or entity undertakes to comply with the debtor’s obligation.

Quantities

The amounts that are handled for unsecured loans vary depending, as you will see in most of the requirements, on the financial institution. But their range is wide and they are usually between €10,000 and €500,000.

Due date

It is usually between 12 and 48 months, but it will depend on the destination of the unsecured loan. If an entrepreneur wants to open, for example, a bar and it is estimated that it will bring benefits in half a year, the refund of the money will be established after said period of time.

Interest rate

Since the risk for the financial institution is greater, the interest is usually higher than that of secured loans. However, the interest rate may vary depending on the financial institution and the borrower’s credit rating. That is why it is important that the borrower compares the different options to find the loan that has the lowest interest rate.

Application

The borrower must present the documents that demonstrate his ability to pay and his identity. Some financial institutions may request additional information, such as personal references or information about the borrower’s employment. In addition, it is somewhat simpler and more agile than other types of loans in terms of processing and acceptance.

Requirements

In general, the borrower is required to present a stable source of income and a good credit rating, as we have already mentioned at the beginning of the article. Now, although each financial institution presents its own requirements, among the requested documentation we can find some common criteria:

• The investment programs or the documentation that explains the destination of the financing and thus responds to the expiration date.
• The balance or the data that reflect the financial status of the beneficiary and, also, that of its guarantor.
• Return commitment embodied in the promissory note which includes both the amount and the interest and the term for its reimbursement.

In addition, and due to the non-existence of a specific guarantee, the financial institution may request additional information to assess the borrower’s ability to pay. That is why it is essential that the debtor is well informed about the requirements of the financial company that he is considering before applying for a loan.

Loan with personal guarantee

The loan with personal guarantee is one in which the debtor responds with all of his personal assets, present and future, without any specific asset being subject to the payment of the loan. In the meantime, the borrower can continue to use his assets at his choice, from selling them to donating them if he so desires.

As you can see, although a promissory note does not necessarily interfere here, personal guaranteed loans are also an appealing formula for the client along the same lines as unsecured ones. In fact, they imply more advantages for them than for the financial one: in the case of non-payment, since the bank does not have power over the client’s assets, it is much more difficult to recover the money.