Sometimes life throws these curveballs, and anyone can find themselves in a tough financial position. Unfortunately, with most people operating on credit and unsecured personal loans, they can potentially lose their assets if the financial situation becomes too difficult.
That’s where personal loans come into the picture. For people in financial trouble or those that want to avoid pledging their property, an unsecured personal loan is an option. Let’s take a look at the pros and cons of unsecured personal loans.
Pros
- No Property At Stake
One of the most attractive features of an unsecured loan is that no personal property serves as collateral. Thus, if the borrower defaults, they won’t need to worry about losing any of their personal property.
- Simple Application Process
Traditionally, anyone looking to receive a loan would go to a bank or a credit union. Unfortunately, these institutions tend to have tons of complex paperwork, which can always be a hassle to fill.
When it comes to unsecured personal loans, there are so many different types of lenders. However, the application process is much simpler. Borrowers can look to apply to receive loans from peer-to-peer lending sites from their own homes.
It takes less than 24-hours to get approval on an unsecured loan application.
Cons
- Lender Troubles
While a property does not serve as collateral in an unsecured loan, lenders can still potentially place a lien on the borrowers’ assets. They can do this to secure repayment.
To successfully obtain a lien, the lender must go to court and sue the borrower. If the lender has a good enough lawyer, the borrower might be forced to pay the attorney and court fees on top of the original loan amount.
When the dust settles on everything, the borrower may find themselves with a mark on their credit report and a major burden on their wages. It would be difficult to pay off personal loans.
- Smaller Loan Amounts
The way lending works is clear to pretty much everybody. Lenders will earn interest on the loan amount, which is their profit. However, there’s not going to be any profit if the borrower defaults.
That’s why an individual’s credit score matters so much when they’re applying for a loan. To receive a larger loan, institutions typically require property as collateral or a really good credit score.
As the process of giving an unsecured personal loan isn’t so stringent, they tend to limit the maximum loan amount. Individuals with a low credit score especially have to worry about smaller loan amounts.
- Higher Interest Rates
Most financial assets are priced according to their risk. If a loan is safe and secured by property, it’ll have a significantly lower interest rate than an unsecured personal loan.
A higher interest rate means higher monthly payments, and the longer the repayment period, the more money borrowers end up paying.
Conclusion
All borrowers need to evaluate their budget and money goals and consider all financial possibilities before signing off any loan. By understanding the pros and cons of an unsecured loan, borrowers will know if they should go for it or avoid it completely!
