Unsecured Loans

Unsecured loans are those funds which are borrowed without requiring any collateral or security to back up the loan if the applicant were unable to pay. There are various benefits and drawbacks associated with unsecured loans:


* Easy to obtain

Because no collateral is required, it is easy to obtain an unsecured loan. So those without any kind of assets will find this kind of loan the best option for them.

* Quick and faster application process. 

Someone can walk to a lender’s place, apply for an unsecured loan and walk out with the money. Or better yet, some people apply online and are approved instantly. This is very helpful when there is an urgent need for the money.

* Less worry about one’s assets

If a borrower is unable to pay on time for reasons beyond his/her control, there is no reason to worry about any assets being claimed. No one is going to come and attach your house to a loan that was initially unsecured against that house. So, even in tough times, there is a peace of mind associated with an unsecured loan, knowing that your property and assets are safer.

And now the drawbacks:

* Difficult to qualify for

Because they are not secured by any collateral, lenders consider such loans to be risky. This makes them (lenders) stricter when considering unsecured loan applications. And if the borrower’s credit is not that great, it is even harder to obtain an unsecured loan. Thus, even though approval is usually quick and instant, the decline rate is higher with unsecured loans, and thus most people don’t get them.

* Little amounts can be loaned out

Lenders set certain limits on how much they can give out as unsecured loans. This makes it hard for an individual to obtain large sums of money when they need it. Unsecured loans are therefore not suitable for people with a huge financial need at a particular time.

* Very costly

Unsecured loans come with higher interest rates and fees. This makes the entire loan very costly by the time it is paid off (unless someone uses it for a very short period of time, which is not usually the case for a lot of people). And if one’s credit is not excellent, it gets worse.

* Might push customers into long-term debt

Because such loans are not secured with any security, some borrowers tend to lax when it comes to repaying the loan. They are trapped into just paying the minimum or even paying late some times. And those who don’t worry about their credit histories usually default on the loan, thus creating a bad credit history for most people.

A borrower should weigh the benefits and drawbacks before deciding to apply for an unsecured loan.