Despite the apparent great risk, lenders are willing to approve unsecured personal loans with bad credit. It is not such a crazy idea, and is certainly good news for bad credit borrowers.
Lenders are at pains to point out that every loan they approve is a risk. At least, that is the situation with unsecured loans, where no collateral is available from which to recoup any losses made when a borrower defaults. So why do they approve applicants seeking unsecured personal loans with bad credit in the first place?
The simple answer to that question is that lenders have to lend if they are to make any profit at all, but there is a deeper reason too. For a start, the odds of every bad credit borrower defaulting are extremely low, and so there is money to be made even from granting loan approval with no collateral.
But with even some risk existing, it means that applicants face far from ideal loan terms, with higher interest rates and lower loan limits. But such extra things can prove worthwhile if the ultimate goal of securing an unsecured personal loan is realized.
Collateral Vs No Collateral
So, what is the real difference between secured and unsecured loans? Well, as their titles suggest, it is all about security, and the level of protection the lender has against losses. When applying for an unsecured personal loan with bad credit, it is useful to understand how this affects your likely loan terms.
First of all, providing collateral with a loan application puts the applicant in a very strong position to secure approval. There is always a chance that a borrower will default, often through no fault of their own. But collateral is a source of compensation for the lender should the borrower be unable to pay.
With the lender still exposed to risks, getting approval with no collateral is that little bit harder. While secured loans will come with lower interest rates, unsecured personal loans will have higher rates. However, loans of $25,000 are still attainable provided key factors like income and employment are satisfactory.
So, Why Approval Unsecured Loans?
Despite the risks involved in lending without the protection of collateral, lenders are willing to grant loans because they calculate the chances of default are less than a credit history might suggest. In fact, more often than not, granting an unsecured personal loan with bad credit is no big risk at all.
This is down to two reasons. Firstly, the motive of the borrower is usually positive, where the desire to rebuild their credit reputation far outweighs the risk that they may take the money and run. In fact, statistics show that bad credit borrowers are more determined to make repayments, so granting them approval with no collateral makes sense.
Secondly, the factors that really matter provide a more accurate picture of what is affordable and not. Income is fine, but the debt-to-income ratio reveals whether or not an unsecure personal loan is truly manageable. Its 40:60 rate means if repayments on a new loan push total debt repayments over 40% of income, then it is deemed too expensive.
Loan Options To Consider
Finding the best possible options when seeking an unsecured personal loan with bad credit is not as time consuming as it once was. This is thanks to the Internet, and the plethora of online lenders who offer excellent terms to bad credit borrowers. They can be found quickly though comparison sites.
Online lenders also offer faster approval procedures, so even when seeking approval with no collateral the chances of success are greater. What is more, because loan repayments are organized directly with your bank, and withdrawn automatically on certain days, the chances of defaulting are minimized.
This means that the risk is lowered a little more, making approval of an unsecured personal loan more likely at affordable rates though this does depend on the size of the loan involved.