There are two types of loans: secured loans where the borrower offers collateral and unsecured loans where no collateral is offered. Unsecured loans are also called signature loans. But when this type of unsecured loan is given to a person with bad credit, then it appears risky. But the truth is that risk is all a matter of perception!
Higher Rate of Interest
Secured loans are given to people with bad credit because if there is a default, the collateral goes to the lender. But unsecured loans are granted to people with bad credit too but at a higher rate of interest. A fact that is to be recognized here is that a person with bad credit will rarely have any collateral.
Therefore, unsecured loans to such individuals will entail a higher rate. There are stringent penalties for defaulting, and there is also a limit of $25000. The lender, in this case, will make a neat profit. There are lenders in Utah offering title loans, signature loans and many other such secured and unsecured loans.
Why Lenders Offer Unsecured Loans?
If giving unsecured loans to bad credit people is risky, then why do lenders still offer them? As mentioned earlier, the first reason is that the lender makes a higher profit on these loans. Another fact is that people with bad credit wish to improve their credit history and if they repay this loan on time, their credit score will go up.
This serves as an incentive to the borrower to make payments on time. So, the risk of default is not as large as it is perceived. The lenders also ensure that the loan is affordable with smaller monthly payments, thus implying fewer defaults. They do this by extending the term of the loan.
Today it is easy to find loan options online from a wide variety of banks and other lenders. There are also many websites where you can compare the terms and conditions of these lenders, thus reducing your leg work.