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Moreover, in order to understand who's problems and needs unsecured loans address, it is important to understand the nature and significance of collateral and its relation with the variable that decides the price and cost of any financial transaction: RISK. Knowing how these two variables interact will help you understand if an unsecured loan is right for you.
When an asset is used as collateral for a loan it reduces the risk involved in the financial transaction significantly. This is due to the fact that in the even of default, the lender can recover the money through the legal action of repossession. Though the lender most certainly would prefer a normal repayment process, the risk he is taking when lending through secured loans is significantly lower than the risk involved in lending through unsecured loans.
Thus, unsecured loans are undoubtedly a risky transaction in the eyes of the lender. Alternatively, the borrower knows that though the lender can legally recover his money, if he decides to pursue legal means, this will cost him a lot in terms of legal fees and especially, the recovery may take months or even years of legal procedures.
To reduce this risk, the lender will require that the applicant meets certain credit conditions. Mainly, an applicant must have a good credit rating with few (and preferably none) stains on his credit report. Bad credit and no credit are a problem when trying to get approved for unsecured loans. However, there are lenders willing to approve unsecured loans for people with bad credit, no credit and even bankruptcy but they tend to charge higher interest rates.
Another requirement that the lender will pretend the applicant to meet is a steady and provable income. This means that those that are not able to probe and income or that haven't been in the same job for at least two years are less likely to get approved for an unsecured loan than those who can show proof of at least a 2 year period on the same job with equal or superior income.
Tenants have almost no other option than to resort to unsecured loans. Unless they can offer a car or some other asset as collateral, due to being non-homeowners, unsecured loans are their only choice. Usually, this implies that they have to face higher interest rates and costs. That, added to the fact that they have to face rent payments and thus have less income available for loan repayment reduces their ability to get better terms on loans.
Homeowners on the other hand, though they can get secured loans with very advantageous terms, can also get excellent deals on unsecured loans. This is due to the fact that their assets are a guarantee of their solvency even if they are not used as collateral for that particular loan.
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