If you don’t pay your mortgage, the bank is able to take possession of your house in order to recoup some of their investment. However, unless you intend to obtain a secured loan, your reputation is sometimes the only thing protecting personal loans. Before applying for a loan, make sure you understand the pros and cons of unsecured loans first. 

Unsecured Personal Loans – What Are They?

Personal loans are financing options to help you make purchases or cover expenses you have. These can be bills, medical debt, renovations, or settle other debts. If the loan is unsecured, that means you are not putting any collateral down on your end. Secured loans, which are typically mortgage loans, often have your house as collateral to secure the loan.

Unsecured loans face higher interest rates and fees, as well as limits on how far the loan can go. Because there is no collateral required, it can be harder to obtain an unsecured loan with bad or low credit.

Pros of Unsecured Loans

Your Personal Property is Safe

With secured loans, the lender often receives insurance through collateral you put down on the loan – such as your house. If you default, they can take that collateral to pay off the loan. 

However, unsecured loans are not backed by any of your personal property. Thus, in the event of default or difficulty making payments on time, the lender cannot take your home or any other personal property.

Simple to Apply

Unsecured loans can be obtained from a large network of lenders besides banks and credit unions. You can easily apply for unsecured loans online from the comfort of your home. Some lenders offer fast approval and can get you funds within 24-48 hours as well!

Note, your credit score and history will still be used to determine if you qualify for the loan. Proof of stable and secure income is often required as well.

Cons of Unsecured Loans

Risk of Default

While unsecured loans are not backed by personal property, a lender can still come after you should you default on your loan. It’s not free money, after all. When you default on an unsecured loan, a lender can place a lien on your home or assets to secure repayment – which means they will sue you first! Besides repaying the loan and late fees, you may also have to cough up attorney fees and court costs, a stained credit report and destroyed wages.

Smaller Loans

There is no profit for lenders if they provide loans that cannot be repaid. So, expect lenders to offer loans that best limit the risk of borrower default. Like banks and credit unions, private lenders will check your credit reports, and verify employment and income before approving your loan. When the loan is unsecured, many lenders will limit the amount of money they lend, especially if you have a lower credit score.

Higher Rates and Payments

Unsecured loans are riskier for lenders because they are not backed by collateral as insurance. Thus, expect to pay higher interest rates. Lenders will base the rate they charge you on your credit score and the amount of funds you’re borrowing. Some lenders may also charge fees for their services.

Higher interest rates will equal larger monthly payments. The same is said for your amortization period, the longer it is, the more you pay in interest.

Always ensure unsecured loans will align with your budget otherwise you could get in serious hot water. Unsecured personal loans often have substantial late payment penalties which could hurt your bank even more if you weren’t prepared upfront.

Conclusion

Unsecured loans can be a great way to secure funding for large purchases or debts you wish to repay. Of course, it’s important to be wary that they come with higher risk, fees and interest rates compared to secured loans. While unsecured loans can be used for many different reasons, you must be aware of the substantial risk that comes with them.

If you are looking for more information about the pros and cons of unsecured loans, The Mills Team is hear to answer all your questions and get you the financing you require.