You may have wondered why unsecured loans that are granted by banks and traditional lending institutions have so many credit requirements and why they are so hard to qualify for. Truth is that this has not a simple explanation but we can try a fairly accurate clarification of this fact by analyzing how risk affects these loans.

Risk And Unsecured Loans

The lack of security turns unsecured loans into a high risk financial transaction for the lender. The guarantee for repayment is only the commitment of the applicant and eventually, a long and costly trial to recover the money. The process to legally claim a debt on secured loans is, as opposed to the above, shorter and less expensive in terms of legal fees and charges.

Thus the main security for the lender is the borrower’s behavior. That’s why they need a credit history. It is the only way to foresee what the chances of the applicant defaulting on the loan are. Also, the characteristics of the borrower’s income will determine the probability he has of affording the monthly payments without missing payments or paying late over the whole life of the loan.

Banks are not keen on risks. Both banks and traditional financial institutions tend to avoid risk as far as possible. That’s why, when it comes to unsecured loans that are already a risky loan product, they expect harsh requirements to be met in order to approve an unsecured loan application.

Requirements For Unsecured Loan Approval

Income is one of the first requirements that needs to be met in order to qualify for an unsecured loan. The amount of the monthly payments usually can’t exceed 30% of the borrower’s income. This amount is not arbitrary, lenders have evaluated that any amount over that percentage would compromise the ability of the borrower to cope with unexpected circumstances that may reduce his available income.

Also, you need to have a steady and provable income. The "Steady" requirement implies non-lowering or interrupted. If you work on your own you will need to show tax receipts and if you are employed, you need to have at least a two year record with the same employer or in the same field. As regards to the "provable" issue, you’ll need to attach to any application or send it later, all the documentation backing up your income claims.

Credit Score and History are the other main requirements that you’ll need to meet in order to qualify for unsecured loans. Due to the unsecured nature of these loans, the credit requirements are a lot stricter than that of secured loans. No matter what you hear, you can’t get approved for an unsecured loan with bad credit if you apply with a bank. There are bad credit lenders dealing with unsecured loans for people with bad credit, no credit or even bankruptcy but these are non-traditional lenders and most certainly, not banks.

Your credit report needs not to show late payments, missed payments, defaults, foreclosures, and least bankruptcy if you want to get approved for an unsecured loan with a bank. Thus, if your credit score is not that good and/or you can’t show proof of a steady income, you’d better resort to non traditional lenders specialized in dealing with people with bad credit.