Articles » Who Qualifies For Unsecured Bank Loans?
An unsecured bank loan can prove to be of great service to an individual with a good credit history that is in need of cash for one reason or another. These instruments are available to both individual and to businesses, primarily small business.
This having been said, unsecured bank loans can be a fairly difficult lending agreement to procure for two basic reasons. First, this type of lending agreement is, by definition, an unsecured type of loan meaning that the borrower is not offering any collateral in the event of default. As such, the lender finds themselves in a fairly precarious position without any leverage and at the end of the line in the event that the debtor declares bankruptcy. Second, these lending agreements are offered by banks which are by far the most conservative of all of the loaning entities when it comes to offering clients lines of credit.
Of all of the institutions that a person may procure an unsecured loan, banks offer the lowest rates of interest available. This is due to two primary reasons. First, bank management have stockholders to answer to as regards quarterly profit earnings, unless of course the bank is privately owned.
With the exception of the handful of banks that have been guilty of malfeasance as regards the issuance of risky mortgages with the promise of high returns, the vast majority of stockholders want to know that their institution is providing loans to low risk borrowers even if this means that they will receive significantly lower returns than had they been providing loans to higher risk borrowers that have a greater likelihood of defaulting on their notes.
Secondly, banks are held responsible for the security of their depositor’s money. Banks have an obligation to their customers with regards the security of their depositors unlike lending companies who’s investors may be willing to take higher risks with the promise of greater profits.
An unsecured bank loan is an instrument with a fairly high element of risk and, as such, is only offered to those creditors with very good credit histories and relatively low debt to income ratios. For borrowers that fulfill these requirements, an unsecured bank loan can be a rather attractive proposition. Unsecured bank loans are offered at very reasonable rates of interest, sometimes as low as nine percent.
That having been said, the interest rates for these types of loans do vary and are not, by any means, fixed. The interest rates for these loans can very easily go up or down in accordance with the health of the economy. When one considers that lending companies offering unsecured loans to individuals with poor credit may charge as much as thirty percent interest APR, unsecured bank loans can be an excellent choice for those that qualify.
In order for an individual to qualify for an unsecured bank loan, they must pass a fairly stringent investigation of their debt to income ratio. Being the owner of a spotless borrowing history is simply not enough to qualify for these instruments. In most cases, having more than thirty five percent of one’s income dedicated to the repayment of debt will be more enough to sink their bid for an unsecured bank loan.
People may look to procure an unsecured bank loan for their small business for any one of a number of reasons. It must be remembered that any working line of credit established for the purposes of handling the cash needs of a small business is considered an unsecured lending need. Banks issue credit cards to small businesses which are considered a high interest line of credit. In addition, banks may also issue short term commercial loans with a term of anywhere from one to three years.
In both of these examples, the banking institution is in complete reliance on the integrity of the borrower for repayment of the debt. Prior to going forward with either of these options, it is important that the potential borrower do a little research and be aware of their credit score and debt to income ratio. In the event that the borrower does not have the ability to offer any collateral to the bank due to debt that they have already incurred, they might want to reconsider piling more debt on top.
It must be known that should an individual be totally resolute in securing a loan for themselves, there are options available to them aside from unsecured bank loans. There are lending institutions that are more than willing to accept a reasonable number of late payments and a debt to income ratio of over forty percent. Such lending institutions are readily found online and there are a fair number of nationally recognized and well reputed companies to be found.
That having been said, the interest rates that they will offer will be significantly higher than that of an unsecured bank loan. Many times, loans with lending institutions will include a certain number of points. Points are a percentage of the total amount of the loan and in the event that the borrower cannot cover these points upfront, they are often rolled back into the total amount of the loan.
The key to acquiring a no collateral loan with a bank is having made prudent financial decisions over the course of one’s life. Banks are more than happy to loan money to those people with a solid financial history. Making correct and responsible decisions over the course of one’s life can very easily save them thousands and very easily tens of thousands of dollars in interest payments.
