Pros and Cons of Unsecured Personal Loans
Unless you’re a financial wizard, talking about loans can be pretty confusing. For example, do you understand the differences between secured and unsecured personal loans? Let’s start with that basic knowledge before delving into the pros and cons of taking out an unsecured personal loan.
A secured loan is one that is backed by a lien or claim against some type of asset that’s in possession of the borrower. These types of loans are most commonly preferred when the borrower’s creditworthiness is questionable.
On the other hand, an unsecured personal loan doesn’t involve any type of asset or lien. Instead, it’s an agreement made between the borrower and the lender based completely on the borrower’s promise to repay the loan. One main example of an unsecure loan is a credit card. The borrower’s creditworthiness is deemed worthy enough to receive the loan, and then it’s up to the borrower to repay the loan—or have to deal with some nasty interest fees and buildup.
So what are the pros and cons of taking out an unsecured personal loan? Following are some of the advantages:
• When you take out the maximum amount of an unsecured loan, you are then able to pay a lower interest rate.
• Unsecured personal loans don’t use your property or other assets as collateral. Therefore, if you’re unable to repay the loan, you can at least breathe easy that you home and other assets are safe.
• Unsecured loans’ interest rates are fixed, meaning that you can easily plan for when and how to make the payments that are necessary to repay the loan—unlike loans that could involve rising interest rates.
• Approval for an unsecured personal loan can happen as quickly as within twenty-four hours. This is particularly advantageous if you need the money right away or are facing an emergency situation.
• Many lenders offer borrowers the opportunity to obtain an unsecured personal loan online, which is extremely convenient and quick.
Now it’s time for the cons:
• Unable to make your loan payments? Then your loan could become defaulted, which means that the lender has the ability to garnish your wages in order to collect payments.
• Unfortunately, the time period that you have to repay your loan is typically much shorter with an unsecured loan than it is with a secured loan. Consequently, you can expect your monthly payment to be much higher than it would be with a secured loan.
• Typically, interest rates are much higher for unsecured loans than other types of loans. That’s because most of the people who take out an unsecured loan don’t have good credit.
• Finally, unsecured personal loans may be just a tad too easy to get—so much so that some borrowers may begin to use these loans as a crutch, getting themselves deeper and deeper into debt.
Now that you have the pros and cons of unsecured personal loans, do you think you’ll take one out? Or will you opt to go with another type of loan?
Sa is a contributor for CreditCards.org that enables consumers to search and compare credit cards, review the best credit cards offer, and apply online.
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