While most people are interested in unsecured personal loans, as opposed to other options, this does not mean it is right for you. Before you decide on this, you should consider other loan options including a secured personal loan.
Even if your financial footing is solid and you feel good about the future, applying for an unsecured personal loan is a big step. If you are not 100 percent confident that this is the loan product for you, it is time to consider other options.
The word “unsecured” means one thing: the loan is not secured by collateral. Although this sounds like a great advantage (and it is) there are some potential drawbacks of this type of loan.
Unsecured Personal Loan Benefits
No property (collateral) is at risk.
With this loan, you are giving your word to the lender that you are going to pay the amount due during the specified period. The only thing backing up the loan is your signature and the legal documents that you are required to sign.
Simple application process.
The decision to be awarded an unsecured personal loan is based on your credit history and credit score. Along with this, you must have the income necessary to support monthly payments. Since no collateral is involved, the application process is quick and to the point.
Unsecured Personal Loan Drawbacks
- Higher interest rate. The biggest drawback of an unsecured personal loan is the higher rate of interest that you are required to pay. This is due to the fact that you are not using any collateral to back up the loan. When compared to a secured loan, you will find that you are paying at least a couple additional percentage points in interest.
- Limited amount of funding. In most cases, you cannot receive nearly as much money with an unsecured personal loan. The reason for this is simple: the lender is only willing to take so much of a risk because there is no collateral securing the loan.
- Shorter loan period. With a secured loan you can expect a term of 10 to 15 years. With unsecured personal loans, though, the maximum payment period is usually 3 to 5 years.
As with any financial product, there are both pros and cons of unsecured personal loans.
If you do not have collateral or are not willing to “put it up” against the loan, this option may be right for you.