An unsecured loan is a financial product that does not require the use of a personal asset as security. Once you’re approved, you can spend the funds however you’d like and become responsible for making regularly scheduled installment payments including interest. Unsecured financing has become increasingly popular in Canada due to the boom in online financing and the versatile nature of the loans. Keep reading for the answers to all your questions surrounding unsecured loans.
An unsecured loan is a type of financing where no collateral is required to obtain the funds. Collateral, also known as security, is anything of significant value that can be used by the lender to cover the owed amount in the event that the borrower defaults. Because the lender is taking on more risk by not taking any collateral, the borrower tends to pay higher interest and be approved for a lower principal amount.
Unsecured loans can be obtained by both individuals and corporations. Once the borrower is approved for unsecured financing, they will obtain a lump sum amount upfront. After the funds are received, the borrower must make regular, scheduled payments, plus interest, to repay the borrowed amount.
Understanding the difference between unsecured and secured debt, check out this article.
Unsecured financing is a popular financing option for Canadians because it can be used for a wide variety of purposes. Businesses can use unsecured financing for inventory purchases, renovations and expansions. Individuals can use unsecured financing to pay unexpected expenses, make home improvements, or consolidate debt. Keep in mind that these are simply common uses for unsecured financing, the options are virtually endless!
Unsecured loans come in different shapes and sizes. Each form has a unique feature, purpose and functionality. The three main forms of unsecured loans are listed below.
This type of loan allows individuals to consolidate various debts into one single loan. For example, if you have multiple credit cards with high interest and overdue utility bills, you can combine them using a consolidation loan. The loan is used to pay off the outstanding debts, then the borrower is responsible for repaying the consolidation loan. The advantage to the borrower is the interest rate on a consolidation loan is typically lower than other debts and they only have to worry about one monthly payment.
A revolving loan is a flexible form of financing that allows the borrower to access money up to a specified limit. The borrower only pays interest on the amount uses and can make payments to regain access to their full limit. A line of credit is the most common explain of this type of financing.
A term loan is the most traditional form of unsecured financing. The lump sum of the loan is provided to the borrower upfront, then the borrower is responsible for making regular, scheduled payments, plus interest, to repay the debt. This is a popular financing structure for secured loans as well.
Unsecured financing has become more common in the modern world of financing. There are several types that have become prominent, let’s explore these below.
An unsecred loan can be obtain from almost any type of lender in Canada, froms banks and credit unions to direct online lenders. Depending on what type of borrower you are and the types of features you’re looking for, you should have no trouble finding multiple loan options to meet your needs.
It is possible to obtain an unsecured loan with bad credit, however, it can be challenging. Lenders are relying on creditworthiness entirely in their approval processes. It will be difficult for them to justify lending to you if they don’t like what they see in your credit report.
As mentioned, it is possible, just challenging. The goal is to find a lender who is willing to work with your circumstances. This can take some time, so be patient in your search. There are lenders who specialize in bad credit unsecured financing, that’s a good place to start.
Finally, expect that lenders who are able to work with your situation will likely charge higher interest. This is to account for the additional risk they are taking on. Remember that the high interest can be temporary if you refinance the loan in a year and manage the debt responsibly.
If you’re unable to qualify for an unsecured loan, you can resort to a secured loan. If you put up collateral, you’re more likely to get approved and you’ll likely get a lower interest rate.
As with all financial products, it’s important to consider the pros and cons before making a final decision to proceed. Let’s explore the pros and cons below.
While it is challenging to qualify for an unsecured loan, if you know what is expected of you, it can be easier to prepare. Creditworthiness is the main thing lenders consider, however, there are other considerations too. Below are common items that lenders consider for unsecured financing approval.
In addition to the above, you will also need to be the age of majority in your province or territory. When you apply, you’ll need to provide government-issued identification and documents showing your proof of income.
Have you ever thought about the true cost of borrowing?Unsecured loans are a fantastic financial product because of their versatility and flexibility. Although, that doesn’t mean they’re right for everyone. Before making the decision to move forward with unsecured financing, take the time to assess your finances and goals. Once you do that, the decision of whether to use unsecured financing should become much clearer.
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Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.
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