Unsecured loans can be used for nearly any purpose. These financial tools allow you to consolidate debt or even fund a vacation. But it’s important to understand the basics of unsecured loans, and the pros and cons, before you borrow.

To get a handle on unsecured loans, we reached out to Ryan Law, personal financial planning expert and the Money Management Resource Center director at Utah Valley University.

He talked with us about how unsecured loans differ from the secured variety, the downside to co-applicants, building credit with an unsecured loan and more.

Check out our full interview about unsecured loans with Ryan Law:

Q1: What is the difference between secured and unsecured loans?

A1: A secured loan has some collateral tied to it. A common example would be an auto loan. You get a loan for the car, and if you do not pay, the vehicle will be repossessed. The car, then is the collateral, or security, for the loan.

An unsecured loan does not have any collateral tied to it. You get the loan based on your credit score. If you do not pay they cannot take anything, and would need to take you to court if you did not pay. A common example of an unsecured loan is a credit card.

Q2: Is there any downside to applying for an unsecured loan with a co-applicant?

A2: Yes, there is a downside to applying for any loan with a co-applicant. If the co-applicant charges things to the loan, both parties are responsible for paying it. If they do not pay, it will show up a late payment on your credit.

I worked with a client once who had his grandmother co-sign on a number of unsecured private student loans, and he could not pay back the loans. His grandmother did not have the income to pay either, and her credit was heavily damaged in the process.

I would caution anyone to think carefully before co-signing on a loan.

Q3: Are there any benefit to obtaining an unsecured loan? Are there any strict terms to look out for?

A3: There is no specific benefit outside of building your credit history. If that is the goal, then getting a credit card is a good first step. You should avoid loans with high interest rates or pre-payment penalties.

Q4: Can you build your credit score with an unsecured loan?

A4: Yes, you can build your credit score with any loan, including an unsecured loan. Most people start their credit scores with either a student loan or a credit card, both of which are unsecured loans. The key thing to remember is to pay your loan on time, and keep your balance low.

Q5: What advice would you give to anyone seeking a personal loan?

Q5: Check your credit regularly to be sure there are no errors. If you have little credit or you have had problems in the past work with a local bank or credit union where you might be able to get a secured credit card, which will allow you to begin to build your credit.

We want to thank Ryan Law for his great insight and taking the time to speak with us.