Consider These Seven Unsecured Loan Facts

Loans lacking valuable items as collateral, usually real estate or a late model vehicle, to secure a loan if the borrower defaults are called unsecured loans. The loan contract is signed, the money is granted. Usually these loans are taken to fund immediate needs for cash, usually for car repairs, a new medication, a neglected utility bill, etc. Though they are useful financial tools, they also can lead to financial ruin. Consider these facts before taking out such a loan.One: I.O.U.sThe simplest of unsecured loans is the infamous I.O.U. Usually a borrower gets funds from a friend or family member. Because of the threat of bad blood, these loans should be dealt with very carefully. Mark down terms and agreements so all are clear on what to expect when repayment time rolls around.Two: Credit CardsThe most popular form of unsecured debt is the ubiquitous credit card. Using them is akin to taking out a short-term unsecured loan. You are purchasing merchandise on the credit card tab and you are expected to repay it according to the terms and conditions of the contract you signed Rates and fees can climb rapidly, especially if you are a poor payer.Three: Banks and Credit UnionsSome banks still offer signature loans, they are more like to offer a personal line of credit. The amount depends on how credit worthy your are. Credit unions have very low rates and with good credit, this loan should be no problem.Four: Sky-High Interest RatesMany lending companies may argue that because no collateral is offered to secure a loan, they are justified to charge high interest to cover the risk they assume. If you have poor credit and must apply for a loan through a non-traditional lender for a cash advance loan, you could end up paying between 400-500% annual percentage rate on a loan. For instance, a $200 loan could require a payback of $234. It may not seem like a lot to someone who needs cash fast, but it is a tremendous profit. Of course, if you get caught up in requesting extensions, you are on your way to the poorhouse.Five: Unsecured Loans and BankruptcyIf you declare bankruptcy, your unpaid unsecured loans will be totally discharged as the law assigns them the least rights in bankruptcy proceedings. Secured loans such as for a car or home are treated quite differently.Six: Fair Debt Collection Practices ActUnsecured loans like credit cards are covered under this statute. It offers consumers some protection from the behavior of collection agencies should a borrower default. Collectors cannot make harassing calls, call you at work, threaten lawsuits when they have no intention of filing, and other protections. Should they cross the line, you can sue with up to $1,000 recompense for attorney fees.Seven: Know Your NumbersSince the only thing backing up your unsecured loans is your integrity and you creditworthiness, you should be aware of your ratings. The better your credit rating, the better position you are in to negotiate better terms on a loan. Federal law allows you a free credit report once a year. Download it and check it. If you find errors, resolve them before making any loan applications.Unsecured loans do have their usefulness from time to time, but it will behoove you to thoroughly understand the terms and conditions before you sign anything. Only deal with reputable lenders. Pay back as you agreed. Do not let it get out of hand; financial ruin is always closer than you think.