Unsecured Personal Loans

Unsecured Personal Loans Come in Handy When You Don't Want to Encumber Assets

Although they don’t get much press, unsecured personal loans are still alive and well.

They are ideal for people who don’t own – or don’t want to mortgage - a home or other collateral in order to get a loan.

They can be used for just about any purpose, such as buying a car or other real estate. Although your mortgage company wouldn’t be happy if they found out about it, the proceeds of such loans can be used as a down payment on a home, helping to avoid the necessity of mortgage insurance. (Since money is fungible – ready interchangeable – it is difficult to trace how the proceeds of such a loan is used.)

Because the loans are unsecured, the banks are going to be more careful about making them. They will like want proof of an income source as well as good credit scores. The people for will most easily qualify for these loans generally have a stable employment history or sufficient income from other sources, assets such as stock, bonds or artwork and a stable place of residence.

Of course, there are firms, generally called finance companies, that specialize in making unsecured loans to bad credit risks. They are sub-prime lenders and their loans are expensive in terms of interest rates and fees.

In many cases, these finance companies will have an experienced loan officer meet with you and make a judgment call as to whether or not you are a worthy risk.

There are also the so-called “pay-day” loans that lend small amounts for short periods, often at exorbitant rates. These are similar in many ways to the “instant tax refunds” many tax preparers advertise.

Banks that offer “bounce proof” checking are also extending you an unsecured loan, again with very high fees.

Those with good credit can get unsecured loans and lines of credit from established banks and securities firms. They carry a slightly higher interest rate than a mortgage, but don’t require you to encumber your property.

Credit lines of $100,000 or more are available to the best customers.

Many other forms of credit are in fact unsecured personal loans, the major forms being credit cards and student loans.

Unsecured loans can be excellent sources of funding for those whose income is not steady – for example, a resort owner who only makes money for the summer months. But, as I indicated before, they can be used for just about any legal activity.

One caveat about unsecured loans: most banks have clauses in their checking account, savings account and unsecured loan contracts to the effect that if you default on the loan, the bank can seize the money owed it from any other account at the same bank.

So if you want a really unencumbered loan or line of credit, open it at a different financial institution from where you keep your money on deposit.

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