Unsecured loans have quite a bad reputation. There’s a reason for this. Some lending companies use the allure of unsecured loans to take advantage of particularly desperate people. The conditions of these loans allow for predatory lenders to include all sorts of dangerous terms, driving clients further and further into debt.
The simple difference between a secured loan and an unsecured loan is that, with a secured loan, the lender has an asset to seize if you fail to make payments. There is less risk with a secured loan for the lender.
But for some companies, the real difference is in what the lender has to gain from the loan. Lenders are not giving out unsecured loans as a form of charity. They know that there is an inherent risk, and they take full advantage of the fact that they’re taking on this risk. This is how they justify massive interest rates and conditions that only make it harder to pay back the debt.
Still, unsecured loans are not necessarily bad. An unsecured loan can be perfect for someone with no assets to use as security or who cannot afford to risk ownership of those assets.
Let us take a quick look at the upside of unsecured loans.
Why choose an unsecured loan?
The primary reason one would choose an unsecured loan is that they have no assets to use as security. In this case, they have little choice but to choose an unsecured loan. But even those who have assets may choose an unsecured loan, agreeing to higher interest rates in order to ensure important assets do not get repossessed.
Furthermore, certain common loans are, by their very nature, unsecured. This includes student loans, personal loans, and credit cards. Students generally do not have any assets to secure, and personal loans are attractive to people who need quick money for a particular purpose. Credit cards provide easy credit to just about anyone who needs some extra cash available.
For unsecured personal loans, you will need to have a relatively high credit score. However, student loans and credit cards are usually given to people with no credit history. Credit cards, in particular, are a popular and easy way to build a credit history.
The upside of unsecured loans
While many people understandably avoid unsecured loans, they do have their upsides. When it comes to credit cards, responsible use is relatively easy, as you only need to pay back what you spend. If that takes you a couple of months, you still have the advantages of the loan and don’t have to worry about losing assets.
Another upside to unsecured loans is that they’re generally easier and quicker to apply for. When applying for a secured loan, your security needs to be assessed to ensure it is worth repossession. You have to prove ownership and that it is in good repair. Many unsecured loans, on the other hand, can be approved with an online application and a quick credit check.
Interest rates will be higher, but if your credit score is particularly good, you can get a significantly lower rate. Some loans have built-in fluctuation so that your interest rate gets lower as your credit improves.
Unsecured loans definitely have their dangers. Predatory lending companies take advantage of the increased risk by using strategies that are sure to drive you further into debt. However, they do have their upsides. With an unsecured loan, you can get money made available quickly without worrying about losing important assets.