What Is Unsecured Credit? #credit #report #uk

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Definition

Unsecured credit is an arrangement where a borrower receives access to a loan without having to pledge any collateral. In other words, the borrower does not have to offer any type of property that the lender could use if she fails to repay the loan.

Types

Unsecured installment loans are a type of unsecured credit, where a lender provides the money to the borrower all at once. Credit cards are another type of unsecured credit and allow borrowers access to a set amount of money to be borrowed as needed.

Repayment

Unsecured installment loans require a borrower to repay the amount of money borrowed in equal payments spread out over a pre-arranged period of time. With credit cards, a borrower pays only a percentage of the amount he purchased with the card, and as he repay the debt, the money becomes available for borrowing or purchasing again.

Eligibility Criteria

Financial institutions base the decision about whether to extend unsecured credit to a borrower based upon her length of employment and annual income. In addition, banks take into consideration a borrower’s credit score and history, which shows how regularly he repaid his other debts in the past.

Benefits

Unsecured credit or loans typically require less paperwork and take less time to receive access to the amount being borrowed. For instance, since the borrower doesn’t put up property as collateral, the bank requires no appraisals. Unsecured credit is also an option for people who do not own real estate or vehicles, the two items most commonly used for collateral.

Considerations

If a borrower fails to repay unsecured credit, financial institutions have no property to seize, meaning that the risk in unsecured lending is higher. Because of this, unsecured loans often have stricter income and credit score guidelines as well as higher rates of interest.