An unsecured line of credit is an agreement with a lender that allows you to borrow money. The fact that the line of credit is unsecured means that there is no collateral backing up the loan, such as a home or a car. Other names for a line of credit are a revolving credit agreement or open ended credit
About Unsecured Lines of Credit
There are two main kinds of loans: secured and unsecured. Secured means that there is something tangible and valuable that is used as collateral for the loan. Unsecured means you are being loaned money purely based on your good credit and ability to repay. A line of credit that is unsecured gives you a set amount of money available to you to borrow without posting collateral. This amount refreshes as you make payments. A good example of this is a credit card.
Advantages of an Unsecured Line of Credit
There are a few benefits to having a line of credit available to you that is unsecured. First, you don't need collateral to guarantee the loan. Second, the money is available to you quickly without your having to apply each time you need some funds. Third, the interest rates for unsecured loans are often low if you have a good credit rating.
Disadvantages of an Unsecured Credit Line
There are also a couple drawbacks to an unsecured line of credit. For some people, a line of credit is not good because there is often not a set time in which the loan has to be paid off and the interest rates may not be fixed. In other words, some people would respond better to borrowing just what they need and paying it off within a certain time frame. It's very tempting to max out the loan amount and end up paying it off for a very long time. If you need some cash and do not have collateral to offer, a line of credit can be a good idea. Take time to research several options to find the best deal before you apply.
What to Do if You Have Bad Credit
If you have bad credit and no collateral, there are still some financial institutions that will give you a credit line, especially if you have steady employment. However, since your credit rating is bad, there may be fees you will have to pay and you may have a line of credit issued only at a high interest rate. Additional fees may include an annual fee that will be more than is charged for people with good credit and monthly maintenance fees that are charged on top of the interest.
If you're in this situation, see if you can apply for a secured line of credit instead. Once you make regular on-time payments on this loan for a while and your credit rating has time to recover, you should be able to get a better rate on an unsecured line. If you need money right now, consider borrowing from a friend or relative. Consider paying this person interest just as you would if you were borrowing from a bank. If nothing else, it is good practice in responsible money management.
