Personal / Unsecured Loan Details

     Unsecured credit has been a cornerstone to commercial finance for decades and in the last 20 years with the continual rise of domestic non-financial debt (a financial measure addressing the level of consumer credit card debt) unsecured credit has become the background of a consumer driven economy. In its simplest form an unsecured loan is a loan lacking collateral that is it is backed only by the promise to pay of the borrower and their creditworthiness. Unsecured loans take several forms depending on the type of borrower involved. In a small business context there are two main types of unsecured borrowing: business credit cards and business lines of credit. From a commercial perspective nearly all borrowing is unsecured and includes business lines of credit, commercial paper, and debentures/bonds. Finally, from the consumer context there are three main types of unsecured lending: credit cards, traditional personal loans, and non-financial consumer lending.
     Credit cards, traditional personal loans, and non-financial consumer lending are all types of consumer/personal unsecured lending. While the oldest of the three is the traditional personal loan, in today’s market it is the smallest of the three, having largely been replaced by the credit card, which lenders find far easier to sell and package for the public (and therefore more lucrative). Credit cards are generally issued by large national banks to consumers of normal and high credit risk under agreements between large banking associations (VISA and MasterCard). There are a few exceptions to this rule, specifically the large single bank backed networks (American Express, Discover, and Diner’s Club). Credit limits vary widely, but are almost always revolving (you may make purchases up to a specific credit limit, pay down the purchases, and then make additional purchases back up to that credit limit) and allow purchases to be made at a near unlimited number of retail business establishments and websites. Credit cards have become the normal method of transacting business in e-commerce, though debit cards and ACH transactions are becoming more common in that venue. Traditional personal loans today are very rare as they have a sales cost to the financial institution and are more difficult to package using computerized underwriting programs. Essentially an individual secures a loan from a bank on an unsecured basis on which their personal credit is the only guarantee. These loans are generally paid out in a single lump sum. Finally, non-financial consumer lending is a major source of unsecured debt. Pay-day lenders, cash advance, and check advance firms are included in this category. Essentially, they provide an advance of cash (or normally a check in lieu of cash) to an individual based on expected future earnings or a post dated check. These loans are generally high interest (rates sometimes ranging as high as 300% or more, depending on state law) and are non-collateralized as even a check given for the advance may prove to be uncollectible.
     As with any loan, ask the personal loan lender questions before applying if you are unsure about anything. Do not make assumptions! For a directory of personal loan providers, try the Debt Consolidation Loan Directory.