The difference between personal loans and other types of loans is that the first ones are granted without collateral, which implies a certain financial risk for the lending institution. Hence, not all banks grant them. On the other hand, those banks that grant them do so under strict compliance with a series of requirements, such as those proposed by Bank of America.
The unsecured loans include three types:
- Loans Personal unsecured, those given to individuals for their own use and purposes;
- Unsecured loans are granted to companies, corporations and other business entities responsible for paying the debt, and
- Credits for sales not guaranteed by a personal guarantee, which are granted to a business or company. Here the company is responsible for the repayment of the loan, but in case it does not pay the debt, the guarantor is responsible.
Under what perspectives should the granting of personal loans be considered?
The granting of these loans involves two diametrically opposite scenarios for the bank and for the beneficiary. For the financial institution it means that it does not have a guarantee or element of value provided for the seizure in case of insolvency in payment by the debtor, while precisely for the latter it is equivalent to a business where it has very little to lose. Hence, one might think that unsecured loans are a bad investment for banks ; However, these offer certain advantages because not all loans are the same.
First, there is the case of an unsecured loan where it is necessary for the borrower to make all payment payments as an individual natural person, but there are also those types of loans called unsecured business where the borrower is not a person natural, but a company, and finally there is an unsecured loan with personal guarantee, in which there is a guarantee, not by the borrower who in this case is a company, but by a person who assumes the guarantor condition of paying the entire loan.
What is the appeal of this type of loans to financial institutions?
Naturally, these loans in a personal capacity offer ample benefits for the borrower and a lot of risk for the lender, so the latter offer them under the condition that the borrower meets a series of requirements, making them practically a kind of reward for loyalty on the client.
One of the fundamental requirements imposed by Bank of America to access these loans is a certain credit score by the borrower, because this kind of indicator offers an idea of the payment capacity that this person possesses.
In addition, by assuming a greater risk with these types of loans, financial institutions tend to set a higher interest rate, just as they establish a lower credit line limit than that of secured loans.
Likewise, the restrictions or penalties on these loans are more susceptible than other loans, increasing the possibility of denying the loan to those whose credit history allows us to see that they tend to borrow very lightly.
On the other hand, Bank of America imposes fines and penalties on those who try to consolidate debts with a personal loan.
Since these types of loans are more risky for a credit institution, they may imply a higher interest rate and have lower limits on the credit line of other secured loans. In addition, this banking institution cannot offer you debt consolidation loans if you are considered prone to get into debt problems again.
What can this type of loan be used for?
The destination of unsecured personal loans varies, because it may well serve to consolidate other debts, for example, credit cards and other debts conceived with high interest, because these debts are combined into a more manageable and with lower interest rates; as well as it can be used to pay for educational or health expenses.
In sum, these unsecured loans contain many and higher risks for the financial institution because there is no guarantee to support the debt in case the loan is in default. Therefore, they can be more difficult to achieve, carry a higher interest rate, and have lower limits, generally only reaching up to US $ 5,000.