Borrowing 101: What is an Unsecured Online Loan?

In the middle of a financial emergency, you need money fast, so you head online to find something that can help in a pinch. As you scroll through your options, you might notice banks and online direct lenders use some pretty specific language. While some lenders offer secured online loans, others provide unsecured borrowing options.

So, what does it all mean? Keep scrolling to find out before you decide one is better than the other.

The Meaning of “Secured” When it Relates to Your Loan Online

Any time someone talks about secured loans, they refer to a type of personal loan that are guaranteed by an asset. These assets can be almost any personal belonging of equal value to the loan. However, in most cases, they wind up being a car or home.

A mortgage, for example, uses the house as collateral. If something prevents you from paying off your mortgage, your lender can claim the property as collateral via foreclosure.

The same rule applies to online loans that are secured. If you can’t repay what you owe, your lender may take your asset instead.

What is an Online Loan When Unsecured?

As the opposite of secured loans, unsecured online loans don’t use collateral. If you don’t have a valuable asset that you’re willing to borrow against, not having to provide collateral is one of the many benefits of online loans that aren’t secured.

Why would any lender offer funds without the safety net of collateral? Online direct lenders assess and offset their risk in other ways.

Depending on your lender, they may check your credit to understand your past borrowing history. While bad credit doesn’t necessarily mean you’ll get rejected, it will change the kinds of loans you may qualify for online. Online direct lenders often raise their rates on bad credit loans, so you’ll pay more to borrow.

Besides your credit score, you may also have to show proof of your employment history, income, and pay schedule. This information gives a lender a good snapshot of your current finances to see if you have enough money to cover your repayment.

Your debt-to-income ratio may also factor into their decision. This ratio shows how much of your income is tied up with existing loans.

Generally speaking, if your DTI exceeds 36% (in other words, more than 36% of your paycheck goes towards debt), you may find it challenging to get approved. This stat tells online direct lenders you may not have enough cash available to handle another loan.

How Do You Improve the Chance You Get an Unsecured Loan Online?

If you don’t have (or want) to put up collateral to shore up your next loan request, unsecured options are available. To increase your chance of getting one, you have to think about what makes you less of a risk in the eyes of online direct lenders.

Good credit, reliable income, and a manageable DTI are all the hallmarks of a safe borrower, so anything you can do to improve these areas of your finances will increase your odds. Work on adding positive payment history to your credit score and look into boosting your income.

If a financial disaster strikes before you can improve these stats, don’t worry. Installment loans for bad credit exist, so there’s still a good chance you’ll be approved. Just understand that you may have to pay more for this opportunity.