Unsecured Loans Key to Recovering a Good Credit Rating

When things go wrong, and a worsening financial situation results in defaults on a loan, the result is a bad credit rating. Recovering from this fall from financial grace can seem impossible, but there are ways, and the best is to get an unsecured loan and this time meet the payment  obligations without fault.It does seem ironic that such an effective way to recover from bad credit is to take on more credit, but there is no surer way to show lenders that the mistakes of the past have been learned. This is why products known as unsecured bad credit loans are available, providing those who were victims of circumstance with a chance to regain their credit rating.Of course, loans that are unsecured carry with them a greater risk than their secured alternative, but they are generally the only form of financing on offer since, for the borrower, the previous debt would probably have been repaid had they anything to use as collateral in the first place.Unsecured over Secured LoansFor those who are a little confused between the two types of loans, an unsecured loan is issued on the basis that the borrower has a sufficient monthly income and a decent credit history.Obviously then, the loan limit is considerably lower and dependent on the rate of income. For example, someone who earns USD6,000 per month will qualify to get a larger loan than someone with a USD4,000 monthly income, provided the existing expenses are not proportionally greater.Secured loans, on the other hand, are based much more on tangible collateral than on the faith loans that are unsecured are based on. So, if an applicant needs USD100,000, then the lender will seek a possession from the borrower equal to that amount. Often, it is equity on a home, and sometimes the actual item that is being purchases, such as the car for which an auto loan is issued.Why They WorkWhen it comes to unsecured bad credit loans, the lender must clearly exercise a much larger degree of faith in the transaction. However, they benefit on a number of levels. Firstly, the interest rate tends to be much higher than with regular unsecured loans, and indeed secured loans. Often, the actual sum that is lent is relatively small, perhaps only USD3,000, for example.The reason for this is the realistic chances of the borrower managing their repayments, and with loans that are unsecured based mostly on income, the ability to repay can be limited.Having said that, some lenders are willing to lend above USD25,000, armed perhaps with the stern belief that the borrower is aware of the opportunity an unsecured bad credit loan is presenting them with. This faith, then, is a powerful tool in the relationship between borrower and lender.The Recovery ProcessIt is possible to get an unsecured loan that with terms ranging from only 12 months to as long as 15 years. When it comes to loans of larger sums, be prepared to take the longer term as, under the circumstances, the priority will be managing the repayments without fault rather than calculating the lowest interest.However, it is generally advised that when trying to regain a good credit rating, loans that are unsecured should be short term in duration because once that loan is flawlessly repaid in full the rating jumps back up.It may be a good idea then to borrow say USD3,000 and repay it over 12 months. In this way, the unsecured loan is lower in risk for the lender, easier to manage and quicker to repay in full.