Understanding the Pros and Cons of an Unsecured Personal Loan

13 Jul 2020

You may have often come across the term “unsecured loan” when looking through possible personal loan options. It is a slightly more common method for taking out a loan compared to the alternative “secured loan”. Which one you chose largely depends on your credit history and financial standing. Through this article, I’ll be listing all the pros and cons of unsecured loans so you can make the best financial decision. 

What is an Unsecured Loan?

An unsecured personal loan is a loan that isn’t protected by collateral. In other words, lenders don’t need to pledge any physical asset (home, car, etc) in order to receive the loan. It can also be called a “signature loan” because your signature is all you’re using to make the promise of repayment. That promise is not secured by any physical asset or collateral. 

Types of Unsecured Loans:-

An unsecured loan can be a credit card, student loan, or personal loan, and they’re all available as revolving, term, or consolidation loan depending on your needs. 

  • Revolving Loan: a loan that has a credit limit that can be spent and repaid any number of times until the period expires. 
  • Term Loan: a loan that is withdrawn once and paid off in equal installments until the loan is cleared. 
  • Consolidation Loan: a loan that is withdrawn to pay off a credit card or another loan.

Pros of Unsecured Personal Loans

  1. No-Risk to Assets:-The most obvious advantage of an unsecured loan is that your personal property is not on the line if you fail to pay off the loan in due time. However, this doesn’t mean that you can take it easy, if you default, your credit score is still jeopardized. 
  2. Easier Application:-Since you aren’t pledging any collateral and simply signing a contract for an unsecured loan, this application process is relatively more straightforward and quick. The only major requirements are an eligible credit score and history and a stable source of income. 
  3. More Flexibility:-Lenders are more open to any accommodations you may need when you are borrowing an unsecured loan compared to one that is secured. In addition, you can spend the borrowed money however you like, whereas a secured loan is more strict about what you use the loan for.

Cons of Unsecured Loans

  1. Higher Interest Rate:- Since you’re not pledging a physical asset, most lenders will assign a much higher interest rate to unsecured loans to make the transaction more worthwhile. 
  2. Harder to Obtain:- Again, since there isn’t collateral protecting the loan, the lender will only approve the loan request if you have good credit. They don’t want to entrust an unsecured loan to someone who has a higher chance of defaulting. For this reason, many borrowers might not be eligible for an unsecured loan. 
  3. Smaller Loan Amounts:- Often, an unsecured loan will be offered at smaller amounts compared to secured loans since lenders want to take minimal risks when their money isn’t protected. 

Bottom Line

Unsecured loans are popular among most average consumers, as all your property is safe and the process is quite simple. If you have a stable income and a qualifying credit score, it is advisable to opt for an unsecured loan. However, an unsecured loan can be a more viable option if you’re ineligible for most signature loans. Happy Borrowing!