What Is Unsecured Credit? This Is The Definition And Explanation

Illustration. (Photo: Doc. Antara)

JAKARTA - Unsecured loans are loans that are approved without the need for collateral. The lender does not have the right to take a physical asset (such as a house or vehicle) if the borrower stops making unsecured credit payments.

These unsecured credit loans are also known as "signature loans" because your signature on the loan agreement is all you bring to the table. You promise to pay back, but you do not give any guarantee.

Types of Unsecured Loans

Unsecured debt comes in several forms. Credit cards are a common form of unsecured loans. While you may not think of it as a "loan," you are borrowing money when you spend it on a credit card.

Student loans are often unsecured. Although some people take cash from their homes to pay for school, student loans purely through the Department of Education are usually unsecured.

“Personal” loans, available from banks, credit unions, and online lenders are Unsecured Loans that you can use for any purpose you want.

Compare and contrast

To reinforce the concept, it may be useful to look at loans that are not Unsecured Loans.

Auto loans are usually secured loans. When you borrow to buy a car (or borrow with your car title), the lender has the right to take your car if you stop making payments.

Home loans are also guaranteed. Whether you borrow to buy your home or you get a second mortgage, you run the risk of being evicted from your home through foreclosure if you fail to repay the loan.

What is Known About Unsecured Credit?

Business loans can be secured or unsecured. If your lender requires you to make a personal guarantee, you may have to pledge your home or other assets as collateral.

Even with a secured loan, your credit may be damaged if you stop making payments. The fact that the lender takes your collateral doesn't change that.

In fact, sometimes lenders sell collateral, but the proceeds from the sale are not enough to pay off the balance of the loan. When that happens, you lose assets, damage your credit, and still owe money on the deal due to a shortage assessment.

What's more, the lender may charge a penalty fee, which increases the amount you owe. Finally, the lender can take legal action, and they may be able to take cash from your bank account or embellish your wages.

Approval for Unsecured Credit

To get unsecured credit, you don't need to pledge anything as collateral. Instead, the lender will evaluate your loan application based on your ability to repay. Lenders look at several factors to decide when or not to pay.

Lenders check your loan history to see if you have successfully repaid loans in the past. Based on the information on your credit report, the computer creates a credit score, which is a shortcut for evaluating your creditworthiness.

To get unsecured Credit, you need good credit. If you have made very few loans in the past (or you have bad credit because you have fallen on hard times in your past), it is possible to rebuild your credit over time.

Lenders want to make sure that you have enough income to pay back the new loan. When you apply for a loan (whether secured or unsecured), the lender will ask for proof of income. Your payment stubs, tax returns, and bank statements will most likely provide sufficient proof of income.

Then, the lender will evaluate how much your new loan repayment burden is compared to your monthly income. They usually do this by calculating the debt-to-income ratio. If you can't qualify for unsecured credit based on your credit and income, you may still have options.

If you have difficulty applying for a KTA, CekAja can be a solution to make it easier for you to apply for a loan.