Banks offering more unsecured loans to borrowers with high credit scores

Banks are offering low interest rates to attract low-risk customers.

The American loan market continues to change and evolve in the wake of the financial crisis. One of the latest trends is the increase in unsecured personal loans granted to borrowers with high credit scores. As this blog mentioned last month, these loans are up 8.7 percent in the past year and totaled $34.5 billion in the first six months of 2014, according to data from credit bureau Equifax. The increase is the biggest since 2008.

Unsecured personal loans are not backed by collateral, so that if borrowers default, their credit scores will absorb the impact but they won't face foreclosure or repossession. These loans can be used to buy a car or a home or even take a vacation, and according to the Wall Street Journal, were traditionally issued to borrowers with poor credit histories at high interest rates.

Now, with the lending market only slowly recovering from the recession, banks are competing for customers with high credit scores and issuing personal loans with minimal paperwork and fixed rates as low as 2 percent. Conversely, financial services company Bankrate says that the average interest rate for a personal loan is 10.82 percent.

This is because interests for subprime borrowers are still as high as 35 percent. The personal loan market is still largely unregulated compared to others, which allows banks much more leeway when it comes to setting their terms.

Personal loan software can help ensure that lenders get a good return on their investment and that borrowers keep their credit scores high. By processing the borrower's credit information, users can establish ideal amortization schedules to guarantee automated, on-time payments.