Unsecured Loans Benefits and Drawbacks

One wonders if all the benefits unsecured loans provide really make up for its drawbacks. In this article we analyze both pros and cons of Unsecured Loans and explain why in some situations unsecured loans are the best choice.

As with most things, what may be useful for some people can be useless for others and what is disposable for some people can sometimes be essential for others. This is also true as regards to loans. Unsecured loans can sometimes be helpful and sometimes they are the only choice some people have to get finance.

Any Purpose?

When financial institutions want to promote unsecured loans, they usually claim that you can use an unsecured loan for any purpose. The truth is that there are secured loans that can also be used for any purpose. A home equity loan does not have a specific use and the money you get can be used for whatever you want. Thus, the “any purpose” benefit does not seem to be such an advantage.

No Collateral

The other common claim is that since unsecured loans do not require collateral, the risk of repossession does not exist. This is actually true but what they forget to state is that the lender is still entitled to take legal actions to recover what he has lent. Collateral is only a guarantee, it gives the lender several rights over the asset in case there are more creditors willing to recover their money. All the other debtor’s assets will be sold before in order to pay other debts.

Loan Amounts

It is a common belief that one can borrow more money with a secured loan than with an unsecured loan. This is only true in some cases. With a secured loan, one can borrow as much money as the asset’s value can guarantee. However if someone has a good credit score and many assets, all of this would be “guaranteeing” any loan he might request and thus, he can get a higher amount by applying for an unsecured loan. This is especially true when it comes to unsecured business loans.

All the above is also applicable to loan’s length. Loan lenght is also determined by the risk involved for the lender and someone with many assets and good credit, even if he does not offer an asset as collateral, is a low risk prospect.

Tenants And Non-Homeowners

As stated at the beginning of this article, unsecured loans are sometimes the only choice some people have in order to get finance. Tenants and Non-homeowners can not offer an asset as collateral and thus, have no other choice but to apply for an unsecured loan.

Due to the highly competitive nature of the unsecured loan market, the interest rate charged for unsecured loans has been decreasing over the years and at the present time unsecured loans’ interest rate does not differ much from secured loans’ rate. So, it is not strange that many homeowners are opting for unsecured loans and holding back to their properties in case they need to request a secured loan in an emergency situation.