Pros and Cons of an Unsecured Personal Loan
An unsecured personal loan is a serious step to take, even when your finances are in pretty good shape. You can’t default on a loan you don’t have, so taking the step of applying for a loan puts you in at least some degree of risk. Below are some advantages and disadvantages of an unsecured personal loan.
Pros of an Unsecured Personal Loan
- No property is at risk. A personal loan is basically your word, backed up only by your signature and the legal documents you sign, that you will pay back the loan. A secured personal loan is one where you put up property to guarantee that you will pay back the loan. Auto and mortgage loans are examples of secured loans. If you default on the car loan, the lender can repossess the car.
- Simpler application process. The decision on an unsecured personal loan depends largely on a person’s credit score and credit record. Of course, a person must have a steady source of sufficient income, as well, to get an unsecured personal loan.
Cons of an Unsecured Personal Loan
- Higher rates. This will vary considerably among lenders, but most lenders will charge several additional percentage points for an unsecured loan, as opposed to a secured loan.
- Limited amount of money. Generally speaking, lenders won’t give as much money for an unsecured loan as they will for a secured loan. Again, the issue here is risk and lenders are professionals at assessing risk. An unsecured loan poses less ultimate risk to the lender because of the property securing the loan.
- Shorter loan period. Another director factor of the increased risk with an unsecured personal loan, a lender will usually cap off the payment period at 3 or 4 years, as opposed to 10 or 15 years with a secured loan. This also is a factor of the limited amount of money involved in unsecured loans. Since the loan totals aren’t that high, there’s no reason to spread the loan over a longer period.
- Debt can lead to more debt. The very fact that you have chosen to apply for an unsecured personal loan suggests an unexpected problem that your current budget and savings situation cannot handle. If more financial bad news arrives, you are now less able to manage this second problem because you already are in the middle of paying off a loan in reaction to the first issue.