Lending products fall into two quintessential categories: secured and unsecured loans. Today, we will talk about unsecured loans, the pros and cons to choosing one, and the situations in which they are likely to be the best options for you. Let’s get started!
An unsecured loan is both issued and supported by a borrower’s credit worthiness. In comparison to secured loans that include collateral or an asset as security, an unsecured loan doesn’t provide an asset as a guarantee. In most cases to get approved for unsecured loans, borrowers must have high credit ratings, since that is the only guarantee that confirms their reliability.
The benefits are evident. To begin with, you don’t have to provide an asset as security. That means you won’t risk any of your valuable assets. Secondly, the application process is quite easy. You can have the money in as little as a few hours.
And thirdly, unsecured loans typically offer flexibility when it comes to the purpose of the loan. In other words, you can use the money for whichever purpose you want: to invest, consolidate your debt, so on and so forth.
While getting an unsecured loan seems like a good idea since you don’t have to provide a guarantee, there is more to it.
Evidently, unsecured loans are greater risks to lenders as they cannot repossess your collateral if you default on the loan. As a result, the interest rates are much higher. On that note, it’s best to know what to expect when you decide to take out an unsecured loan.
When it comes to unsecured loans, the debt-to-income and credit score requirements are much stricter. These loans are provided almost exclusively for the most credible borrowers only.
Unsecured transactions are the riskiest for lenders. Hence, that will also limit the borrowing amount. In other words, if you need to borrow a significant sum of money, you might be unable to do so.
What Happens If You Default an Unsecured Loan?
If you default a secured loan, the lender gets possession of the collateral to make up for the financial loss. On the other hand, if a borrower defaults on unsecured loans, the lender is unable to claim property. At first, the creditor will aim at contacting the borrower to try to get payment.
In the event in which the creditor and the borrower cannot reach an agreement, the creditor’s alternatives are the following:
- He/she can take action and commission a collection agency to take the borrower to court or collect the debt. If the borrower is unable to make repayments, things can get ugly.
- The court may rule in the lender’s favour. In such a case, a lien could be placed on the borrower’s wages or any other possession. Either way, the borrower will be ordered to pay off the debt. During this process, legal fees can pile up quickly.
How to Compare Unsecured Loans
Numerous lenders offer promotional incentives when it comes to unsecured loans. That’s why you may might find it difficult to make a decision.
Consider the following factors in making your decision making process.
- Interest rate. Undoubtedly, the interest rate is one of the most significant aspects you should factor in. As a general rule: the lower the interest rate, the lower the repayments. Make sure you compare various interest rates before you seal the deal. After signing the loan forms, there’s no turning back, so choose wisely.
- Fees: Next on your list of priorities should be the fees the lender charges, apart from the interest rate expenses. For instance, if you intend to repay an unsecured loan earlier than specified, you are likely to be charged for doing so. That’s not all; you might also be charged if you wish to make additional repayments to minimise the life span of the loan.
- Additional repayments: Some lenders allow borrowers to make additional repayments at no extra cost. Make sure you discuss this aspect.
- Redraw facility: Redraw facility enables you to withdraw the extra payments you’ve directed into the loan. This is a helpful factor, especially in the case of an emergency when you’re in need of cash.
- Minimum and maximum loan amounts. All lenders establish minimum and maximum lending amo Although there is no guarantee that you’ll be eligible for those amounts, being informed in this respect is definitely recommended.
To sum up, unsecured loans aren’t all bad just as they aren’t all good. It’s up to you to analyse your individual circumstances before sealing a deal. Taking out a loan isn’t a decision that should be taken lightly, and this is the key to doing what’s best for you.
If you’re uncertain about choosing a lender, contact us today for a free consultation and advice. We know how challenging it can be to find the best lending product, which is why we are eager to help by supplying loans that meet your situation.