LOS ANGELES, October 27, 2021 (Newswire.com) - Loan shoppers should consider a multitude of factors when looking for the right loan for their needs, including whether to get secured or unsecured loans. Unsecured loans can be a great option for borrowers that need to pay expenses such as large purchases or medical expenses without using collateral, but it's important to weigh the pros and cons before moving forward with one. Here's how unsecured personal loans work, the benefits and drawbacks, and how they compare to secured loans.
What are unsecured loans?
Unsecured loans are loans that don't require borrowers to use an asset they own as collateral to secure the loan. Lenders that offer these types of loans will consider factors like borrowers' credit score, income, employment history, and current debts when deciding whether to approve them.
Some examples of unsecured loans include:
- Installment loans
- Cash advances
- Credit cards
- Lines of credit
Secured vs. unsecured loans
Unlike unsecured loans, secured loans like mortgages and auto loans require the borrower to put down collateral to back up the loan. If the borrower defaults — meaning they fail to pay back their loan — the lender can repossess and sell the asset to recoup their losses.
The pros of unsecured loans
Simple application process
Many unsecured loans are very simple and quick to apply for. Many online lenders have a short application process that only asks for some basic personal and financial information. In many cases, the borrower can finish the application in minutes and get their loan either the same day they apply or by the next banking day.
No risk to personal property
Since unsecured loans don't require collateral, the borrower doesn't have to risk any valuable items to get the loan. This can help if the borrower's personal property is useful or has sentimental value.
The cons of unsecured loans
Less favorable terms
Lenders can offer better terms for secured loans when the borrower's collateral is there, since the loan is considered less risky. Borrowers applying for unsecured loans might get higher interest rates, leading to higher payments.
Additionally, the loan amount the lender offers might be smaller since they don't have an item of value to base the amount on. This means that it may take more time and research for borrowers with poor credit to find an unsecured loan with loan terms that work for their situation.
Impact to credit score
Unsecured loans lack collateral, so borrowers who do not meet their repayment obligations could receive collection communications and experience a negative impact to their credit score, making it harder to get loans in the future.
The bottom line
Unsecured loans offer borrowers a quick way to get a loan without using personal property as collateral. And there are many lenders that offer more lenient credit score requirements, so borrowers may still get approved with poor or fair credit. Borrowers should do their research and compare options to find the right loan for their needs.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.
Source: Advance America