There is no collateral required on an unsecured loan, thus the interest rates are normally higher than for an unsecured loan due to the higher risk to the lender. An unsecured loan, often referred to as a personal loan, is not secured against any asset. Of course, you still have to pay the money back and the lender could pursue you into court if necessary to get its money back. But you don’t have to put up your house or car to access loans in Nigeria without collateral.
While the defining characteristic of secured loans is that you’re required to offer up assets as collateral, unsecured loans have no such requirement. If you don’t have any assets to offer, you can consider looking at taking out an unsecured loan. To even qualify for this kind of loan, you’ll probably likely need to provide the lender with proof of income to show that you’re capable of making repayments on your loans. While unsecured loans these are a great option for borrowers without assets, they unsecured loans aren’t the best option for everyone.
Lenders on average charge higher fees and interest rates than their secured loan counterparts. These loans also are known for their high fees for late payments. Lenders can go on to take legal action if you end up defaulting on the loan.
Unsecured loans can be divided further into two categories: open end and closed.
1. Open-end unsecured loans
Open-end loans, sometimes known as revolving credit, are loans you use over and over with an agreed upon credit limit. Provided you don’t go beyond your credit limit and make the minimum payments, you’re in the clear. It’s worth noting that open-end loans create an environment that makes accumulating debt frighteningly easy. Paying only the minimum monthly payments means you can rack up huge interest payments over time.
2. Closed-end unsecured loans
On the other end of the spectrum we have closed-end loans, also known as nonrevolving credit. Closed-end loans provide you with a lump sum of money that must be repaid by a certain date, along with interest and fees. Student loans fall into this category. While closed-end loans don’t provide the flexibility of open-end loans, they do have the distinct advantage of providing borrowers with a fixed payment schedule that limits the interest borrowers end up paying over the life of the loan.