Advantages and disadvantages of unsecured loans

February 08, 2018
Unsecured loans are one of the more common options for borrowing money. These are usually called “personal loans,” and they are available in a number of different forms. Unsecured loans, by definition, do not require collateral from the borrower. For example, if you have a mortgage, then your home would be used to “secure” the loan. This means that you would have to give up your home if you were not able to pay the mortgage every month.
Advantages and disadvantages of unsecured loans

Because of this extra security for the lender, secured loans usually have lower interest rates. Unsecured loans often have higher interest rates. This might be seen as a disadvantage, but it is not necessarily as large of a drawback as you might think. Since some personal loans, such as online personal loans, are for smaller amounts of money and can be paid off relatively quickly, interest rates are not as much of a factor as they would be for larger loans.

Here are some other advantages of unsecured loans.

  • No risk of losing your property. If you do not pay off an unsecured loan, there will be an impact on your credit score, but you are not likely to lose your home or car or other asset.
     
  • The application process is easy. The main factor will be your ability to repay the loan. Banks and some personal loan providers may look at your credit score to judge your ability to repay what you borrow, but most online money suppliers will only ask to see a bank statement and pay stub. This means less paperwork compared to a secured loan, and, more importantly, it means less time between application and actually getting your money. Some online lenders can complete the whole process in one business day or less.
     
  • You can borrow smaller amounts. If you only need to borrow $500, you will not be able to find someone to provide a secured loan. You would have to borrow more than you need if you wanted to get a secured loan. Unsecured loans, on the other hand, are more flexible. If you only need to borrow $500, then you can apply to borrow $500. Some banks may even have minimums for personal loans, but online lenders usually do not have any minimums. 

Here are some disadvantages of unsecured loans (and how to get around them).

  • Interest rates are higher for unsecured loans. However, if you are only borrowing a smaller amount of money, this will not be much of a factor. For this reason, unsecured online personal loans are ideal if you want to borrow less than $1000.
     
  • If you do not pay, you could hurt your credit score. Some lenders do not consider your credit score, so this might not be an issue, but defaulting on an unsecured loan could make it more difficult to get other forms of credit in the future.
     
  • Unsecured loans are often paid in installments. This could be a good thing because it could help you pay off the balance more quickly. However, credit cards sometimes allow you to make a minimum payment that covers only the interest charges. This allows you to pay less if you are having a bad month financially. Installment loans do not offer this kind of flexibility.