unsecured loanAn unsecured personal loan is money that a lender provides to a borrower without the latter pledging any collateral against that funding. Interest rates on unsecured loans tend to be higher than secured loans. Furthermore, these loans carry fixed terms. However, when they serve as a revolving line of credit, the interest rates may vary.

Pros and Cons of Unsecured Personal Loans

One of the greatest aspects of applying for an unsecured personal loan is the fact that you are not required to pledge any collateral against the loan.

After applying for the loan, you can have a response in as little as 24 hours. Sometimes it may take as long as three days, especially if additional information is required from the borrower before finalizing the loan. You can also get the money right away if you’re unable to wait for that period of time.

You may not qualify for a personal loan with a bank, since you’re unable to pledge any collateral against the loan. However, you can apply for an unsecured personal loan through an online lending institution which does not require collateral or a good credit score for approval. To qualify for such loans, you must be employed and receiving a consistent paycheck.

Unsecured personal loans have fixed interest rates. Therefore, there’s no need to be concerned about increasing interest rates. Once you’re approved for the loan, the interest rate provided at the time of your approval will remain consistent until your loan is paid in full.

You can use your loan for any purpose you desire. You have the freedom of using the money for home improvements, or consolidating debts.

While obtaining an unsecured personal loan may be beneficial to the borrower, it can also become a financial burden. This is especially the case when you’re unable to repay the loan according to the terms set in the loan agreement. Defaulting on such a loan does not mean you’ve been cleared of your debt. Although it’s unsecured, you’ll still be obligated to repay the loan. Lenders can deduct payments from your income to recoup the outstanding balance on your loan.

Interest rates for these loans are much higher because of the high risk you pose to the lender. Furthermore, you’ll be allocated a shorter time period to repay the loan. With a shorter repayment period, you’ll have to make higher monthly payments.

Although these loans can be used in whatever manner you desire, some people may abuse the unsecured personal loan system. They may use the loan for purposes other than what was mentioned in their loan application. Take for instance, some people may apply for an unsecured personal home improvement loan, but instead of allocating the funds to that purpose, they use the money on a shopping spree.

Misconceptions of Unsecured Personal Loans

While some lenders may say that loans are 100 percent guaranteed, this concept does not exist. Your chances of applying for such loans may be high. However companies are not required by law to guarantee approval on these loans. Furthermore, if you have good credit, this does not mean that your loan will be approved. Other factors such as your debt-to-income ratio may have greater significance over your credit history.