Unsecured personal loans have become increasingly common and utilized by consumers. These are not just exclusively granted by traditional banks. Online lenders, credit unions, FinTech companies, nonprofit organizations, employer-based programs, and even family & friends may be able to offer it as well.
Increases in the number of lenders that offer these credit lines have equally made it possible for numerous consumers to secure them. You can click here for more information on how to obtain such credit lines.
However, the decision to take out any loan has to be well-informed. This is because credit lines present some risks, as much as they also present several benefits. Knowledge of both the risks and rewards puts people in a good position to make the right decision.
This knowledge also ensures that those who decide to secure this kind of loan make the right moves. For instance, this could be opting for a less convenient but cost-effective short-term repayment plan. Given how important it is for people to make informed decisions in this regard, the risks and rewards of unsecured personal loans will be discussed here. So, read on to stay informed.
Benefits of Unsecured Personal Loans
Two types of benefits will be explored in this section. The first are those that make unsecured personal loans seemingly better than the secured kind. The second is general benefits. These benefits are peculiar to both kinds of credit lines. Having made these clear, here are some of the benefits of obtaining unsecured personal loans:
Quick Approval
For the most part, applicants who are eligible for this kind of credit line quickly get it. The assessment period of fast short term business loans has become increasingly quicker due to advancements in digital technology.
For example, the possibility of applying with BankID means that virtually everything that has to do with the application can be sorted remotely. In other words, the applicant does not have to visit the office of the lender to indicate his interest and/or submit any requested information. Everything can be sorted online.
It is not so straightforward with secured loans. The fact that the pledged collateral has to be critically assessed and other appraisals done is a major reason for this. The collateral assessment process, in particular, takes a while. So, people who need to secure credit lines quickly may be better off with this option.
No Need to Pledge Collateral
Unsecured personal loans are credit lines just as secured personal loans are. However, the striking difference is that the latter requires that collateral be pledged.
Candidly, this comes with its benefits. However, the notable disadvantage is that the collateral is at risk of being lost. This is at least until the borrower has fulfilled all the terms and conditions.
This could be a car, a house, or any other sort of asset accepted as security by the lender. For the record, losing the collateral is a possibility regardless of how slim the chances are.
However, it is not this way with unsecured personal loans. For starters, this is because it is not granted on the same basis. Of course, there are consequences if terms and conditions are not met. However, it is not the loss of any asset serving as collateral.
Competitive Interest Rate
There are more people interested in securing unsecured personal loans. Firstly, many people do not have suitable collateral that can be pledged as security for a secured loan.
Secondly, the thought of losing suitable collateral scares some people who are capable of applying for and being granteda secured loans. The number of people interested in unsecured personal loans is a lot more than those considering the secured kind as a result of both reasons.
Since it is obvious that there is more of a market for unsecured loans, there are more lenders that offer this kind of credit line in the credit market. Such lenders include online lenders, credit unions, FinTech companies, nonprofit organizations, and employer-based programs.
In other words, the credit market is quite competitive for lenders of unsecured personal loans. Consumers have lots of options and leverage as a consequence and should make the most of it. Comparing the several rates among lenders and making the best choice is how to do this.
Whatever it takes to get the best unsecured personal loan deals should be considered. For example, loan calculators on unsecured loan comparison platforms can be utilized for this purpose. You can visit billigsteforbrukslån.com/blancolån/ for more information on this. Additionally, agents that specialize in brokering deals between consumers and creditors can be engaged.
Versatile Use
They can be used for several purposes. Lenders may not even be bothered about your reason for obtaining the funds. This is as long as you commit to fulfilling loan terms and conditions. By the way, some of the several things that this kind of credit line can be used for includes:
- Home Improvement
- Medical Expenses
- Auto Financing
- Purchase of Consumer Goods
- Education
- Business Start-Up
- Debt Consolidation & Refinancing
- Legal Expenses
- Personal Projects
Frankly, there are several other things that this line of credit can be used for besides the aforementioned. However, the secured kind can be quite restrictive in this regard.
For example, a mortgage is supposed to be used to finance the purchase of a real estate property. This is even important because your equity on the property would serve as the pledged collateral. By and large, most secured loan deals do not offer as much flexibility as unsecured personal loans, in the context of usage.
Risks of Unsecured Personal Loans
The decision to borrow has to be well-informed, as mentioned early on. Against this backdrop, informed decisions cannot be made if you are not aware of the rewards and risks. Speaking of the risks associated with unsecured personal loans, discussed below are some of them:
Limited Amounts
Most lenders limit the amount that can be secured via this kind of loan. For example, some lenders only offer small unsecured loan deals. As a result, people who need this credit line for projects with large expenses can be affected.
In Norway for instance, the highest amount that can be obtained with this kind of loan is set at around 600,000 Norwegian Kroner. This is quite large but not large enough for certain expenses.
Credit Score Requirement
The suitability of the pledged collateral is the major reason for granting secured loans. However, it is entirely different with an unsecured personal loan as the credit score is what mostly matters.
As a result, the credit score requirement for being considered for this kind of credit line is usually more stringent. The implication is that people who do not have up to the required credit score can be denied being granted the loan. This in itself does not help an applicant’s credit score as inquiries by the lender to the credit rating authorities will slightly, but adversely impact the applicant’s credit score.
High-Interest Rate
An unsecured personal loan usually comes with higher interest rates than a secured loan. The reason for this is the risk taken by the lender in granting this kind of credit line.
You see, the lender is only taking the borrower for his/her word when granting this loan. Of course, this is after examining the credit and financial profile to ascertain that the borrower is capable enough. As a result, the lender offers the loan with a high interest rate to make up for the risk taken.
Furthermore, the applicant’s credit score also determines how high the interest rate will be. People with low scores will likely be offered terms with higher interest rates compared to those with impressive scores. As a result, applicants need to work on improving their credit scores.
Little or No Tax Privileges
Some secured loans come with tax privileges. This is the case, particularly in some locations. However, unsecured personal loans rarely offer such privileges. This is a disadvantage given the cost-saving benefits of such tax privileges.
Consequences for Defaulting
In defense of unsecured personal loans, many people stress the fact that no form of collateral is pledged. As a result, there is no possibility of losing any collateral if you default.
This is true but there are also consequences for defaulting with unsecured personal loans. Some of these consequences can even be severe. By and large, some of the consequences include:
- Damage to credit score
- Astronomically rising debt
- Legal actions taken by the creditor
- Little or no chances of securing other credit lines
- Embarrassing collection efforts
None of the aforementioned is good for borrowers. For this reason, the decision to take out unsecured personal loans has to be right.
Conclusion
Unsecured personal loans are quite common. Factors including the demand for these loans and the increasing number of creditors that offer them are reasons for this.
These credit lines have their advantages and disadvantages as discussed above. It is expected that people consider the risks & rewards and how it applies to them before securing such loans. Furthermore, the goal should be getting the best loan deals.