First you must understand that an unsecured loan is one that a borrower does not need to have any collateral to have issued. This loan can also be called a personal or signature loan, since only the borrower’s credit rating, employment and housing history are the only considerations for granting the loan.

An unsecured loan is considered the best financing vehicle a person can obtain. This is due to the fact that the lender makes the issuing decision solely based on personal information supplied by the borrower. It is considered a low-risk loan if the borrower’s personal information, including credit history, is high enough to indicate the risk is limited.

Personal loans from lenders other than registered institutions are also considered unsecured but, obviously, these have nothing to do with a person’s credit rating. Although obtaining a personal loan from an employer, friend or relative may include legal documentation defining all parties’ responsibilities to the transaction, these unsecured loans never require background or credit checks. Similarly, any lending institution that does background and credit checks is typically making decisions just as a non-institution financial source does – basing it on the value of your good name and reputation. For financial institutions, your good name reflects your credit and background history.

Three Types of Unsecured Loans

Typically there are three types of unsecured loans:

• A personal unsecured loan is one which the borrower individually is responsible for repayment

• An unsecured business loan is one which the business, and not an individual or corporate officer, is responsible for repayment

• There is also an unsecured business loan accompanied by a personal guarantee from someone associated with that business, typically a corporate officer or the business owner. The individual offers a personal guarantee for repayment of the loan in the event that the business defaults

Unsecured Loan Lending Criteria

All unsecured loans stand a bit of a risk for repayment since there is no collateral for the lender to acquire in the event the loan goes into default. Therefore, underwriting rules that dictate qualification requirements are extremely strict to protect the lender’s liability.

It all comes down to the borrower’s previous credit activity. Obviously, borrowers who have always maintained better than average credit activity over a specified period of time where several loan situations have been satisfied in the correct fashion present themselves as credit-worthy risks. However, the lender still must make decisions based on the borrower’s previous credit activity when determining loan amounts, interest rates, other costs and fees as well as monthly repayments. The benefit to the borrower is not to have to place any personal property subject to lien in the event a default occurs.

By maintaining an excellent credit activity history, borrowers place themselves in an enviable position to obtain an unsecured loan at the lowest market costs available.