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Not everyone is all that thrilled or enthused about borrowing money. Paying cash may be their motto since they hope to avoid finding themselves in debt. While this may seem like a good plan in theory, reality does set in and the time may come when borrowing is both necessary and unavoidable. And yes, there are also instances when doing so is certainly convenient. Unsecured loans are likely the types of loans the average first-time borrower will look into. The term “unsecured” may present a bit of confusion to someone who doesn’t know what is or is not required to be approved for a loan.

Anyone with concerns over the topic of unsecured loans need not fear. The idea behind this type of loan is fairly simple to comprehend.

A Somewhat Reduced Risk Loan

An unsecured personal loan is one that does not require collateral nor is backed by any asset. A home mortgage or an auto loan are forms of secured loans. If the loan is not repaid, the home can be foreclosed upon and a car can be repossessed. Those who take out a secured loan and put up personal property to back the loan would lose those belongings in the case of a default.

In a sense, an unsecured loan is a less-risky loan since default does not lead to losing major property or belongings. This does not, however, mean there are no penalties for defaulting.

Late payments on the loan go against a credit score. Outright default can ruin a credit score. Such bad marks remain on a credit score for seven years. Do not think that default followed by a seven-year wait is a viable plan. The lender could sue the borrower to recoup the money.

Being approved for an unsecured loan comes with responsibilities. Repayment is among the most important. An argument can be made that borrowing too much money is among the worst things a person can do. Being buried with debt is never a good thing, but the ease of being afforded credit leads some to take out unsecured debt.

What Lenders Look For

These loans are usually referred to as “signature loans” because a “mere signature” is required to be approved. Honestly, that is not accurate. The signature authorizes the application, but approval of the loan is based on a careful review. While no collateral is required, there are criteria that must be met.

Anyone who applies for an unsecured loan is asking for a set amount of money. The lender — be it a bank, credit union, or online entity — has to feel the amount of money delivered to the borrower is appropriate. What is appropriate? An amount that can reasonably be repaid based on income and expenses. Someone earning $100,000 a year who is obligated to $35,000 per year in expenses would be a good bet for a $2,000 loan.

The Credit-Worthy Applicant

Of course, credit score plays a massive role in an application’s approval. A person with outstanding credit is someone who is an outstanding applicant. A person with great credit has been borrowing a long time, pays back his/her debts, and does not load up credit cards to the max. Those with very good or just good credit are also solid prospects, but they may be required to pay a bit more in interest. Applicants with poor credit might find options very limited. In fact, they may need to look into secured loans for funding.