The Big Pitfall Of Unsecured Loans

Posted by Nick Niesen on November 8th, 2010

There are allot of different types of loans available. In this article we'll take a look at unsecured loans and why it might be handy in the right situations.

Unsecured Loan Definition: A loan in which no collateral is required. The only guarantee the loaner has from the borrower is their promise to repay.

You can use unsecured loans for pretty much anything including a relaxing holiday, a wedding, debt consolidation or home improvements.

Why most people prefer an unsecured loan:

If you require money to solve any of your financial problems and do not want to give your home for security purposes then the best solution is to apply for an unsecured loan. The period and amount you want to borrow varies according to the terms and conditions of the lender. Some lenders provide loans as small as $550.00 and can offer up to a sum of $25,500. The repayment time can vary from one year to ten years depending on your credit rating and the lender you?re using. You can find unsecured loans from a variety of sources including building societies, larger supermarket chains and your local bank of course.

You should consider few things before applying for an unsecured loan. The lenders have no claims with an unsecured loan. Unsecured lending is normally more risky in comparison of secured lending, which is reflected by the higher rates of interest. Unsecured loan is in reality a loan where lender has no claims on property or other guarantees in case the borrower fails to repay. The creditor solely relies on the ability of borrower for repayment of his loans. So naturally this higher risk loan will fetch a higher interest rate.

With an unsecured type of loan you are not getting a loan against the value of your property. You will be offered an interest rate based on your need and the amount of money you are borrowing. This means that you will not repay according to the rates found in your local newspaper or media. Your interest rate will be decided according to your credit rating, for some of us this can be good but for others this can be bad.

If the borrower fails to repay the unsecured loan, the lender cannot reclaim for the goods, but has a right to find other legal remedies to get the interest and outstanding funds from the loan.

With an unsecured loan it's recommended that you borrow as little as possible and make a budget to specify where and how much money you need so you don't over borrow. Unsecured loans are usually for smaller amounts, thus if you are a homeowner and want to borrow more, you are recommended to apply for secured loan.

The major disadvantage of unsecured loans is the cost of interest.

Unsecured loans are usually more expensive in comparison to secured loans as the lender has no guaranty that you will repay the loan, and therefore they charge more interest from you the borrower. Depending on your situation this might be good or this might be bad.

With a good credit rating you might be able to get an unsecured loan with a low interest rate, but if your credit rating is good you probly have access to other funding resources for low interest rates anyway. Whereas if your credit rating is bad an unsecured loan will cost you allot but if you don't have any other forms of collateral available, this may be one of your only solutions at this point, untill you build your credit rating back up.