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Unsecured Loans

Have you ever wondered whether you should get an unsecured loan? With no collateral and no worries about your assets being seized, unsecured loans present a tantalizing alternative to secured loans. In this brief explainer, we’ll discuss in clear and straightforward terms what unsecured loans are, their types, the main pros and cons, and whether you should consider taking one in the first place.

What Is an Unsecured Loan?

Unsecured loans, known as signature or personal loans, aren’t backed by collateral. It means that an individual can borrow a specific amount of money from a bank, online lender, or credit union for a specified loan term — the period over which they must repay the loan — without worrying about assets being seized.

Like secured loans, unsecured ones involve paying interest and repaying the principal, the original amount you’ve borrowed. To qualify for an unsecured loan, the borrower must have a high credit score, typically at least 580 or higher. Your interest rate will also depend on your credit score; the higher your credit score, the lower the interest rate. If you have a bad credit history, the lender may require a co-signer, another individual with a legal obligation to pay off the loan if the borrower fails to repay it.

Types of Unsecured Loans

Unsecured loans are typically either revolving or term loans. Revolving loans can be borrowed, repaid, and borrowed again. In contrast, term loans allow borrowers to get a fixed sum they must repay in equal installments until the entirety of the loan is paid off. Let’s take a closer look at the most common types of unsecured loans you’re likely to encounter:

  • Unsecured personal loans can cover a wide spectrum of personal needs, like home improvements or paying off medical bills. Although the loan amount may be smaller and the interest rate higher, you won’t risk your personal property.
  • Unsecured student loans typically have faster approval rates but can have stricter eligibility requirements and limited borrowing limits.
  • Unsecured credit cards can include travel rewards and balance transfer cards. They typically come with better rewards and bonuses, but one of the most common cons is that they incentivize spending beyond means.

Who Should Consider an Unsecured Loan?

Unsecured loans should be at the forefront of your mind in the following cases:

  1. Debt consolidation. You may consider an unsecured loan for debt consolidation, paying off the existing debts with a new loan. It can simplify the payment process and lead to lower interest rates.
  2. Large purchase. Planning a big purchase may be a great reason to consider getting an unsecured loan.
  3. Good credit history. Unsecured loans are especially favorable if you have a good credit history. It means you can expect lower interest rates and better conditions.

Unsecured loans are a perfect alternative to secured loans as they allow borrowers to get the necessary sum for their upcoming projects and emergencies without risking their assets. Of course, despite their pros, such as no collateral and less demanding application requirements, unsecured loans have drawbacks, like higher interest rates and fees. That said, whether unsecured loans are a good idea should be considered on a case-by-case basis.