There are several loans available for specific purposes. For instance, an auto loan helps you buy a vehicle, a mortgage helps you buy a house, and a student loan helps you get an education. While each of these loans meets one specific purpose, there is another type of loan which can be used for multiple requirements with an unsecured loan. More popularly known as ‘personal loans’, these loans are those that are not secured by collateral. You are not required to pledge your assets to avail these loans.
What are the uses of unsecured loans?
Unsecured loans can help alleviate urgent financial needs such as a wedding or vacation expenses, an expensive purchase, an unexpected medical emergency, home improvement, or even to consolidate your debts.
Are unsecured loans good for you?
Unsecured loans are very useful when you need funds urgently. Every year, millions of Americans use these loans to pay for unexpected expenses and to consolidate their credit card debts. However, this doesn’t mean that these loans are the best for everyone. Before you opt for one, here are some facts to consider before taking a personal loan:
| Pros | Cons |
| Unlike secured loans, these loans are not backed by collateral. And so your property or assets are not at risk in the event of a default | Although there is no asset or property at risk, when you miss payments on unsecured loans, your credit score takes a beating. This can affect your ability to borrow in the future. |
| Applying and getting approved for unsecured loans is relatively simpler compared to other loans. Most lenders are now accessible online to streamline your experience. | These loans are typically smaller loans ranging between $1000 and $50,000. If you need to borrow a larger amounts, these loans may not be suitable for you. |
| One of the most important benefits of these loans is that they are multi-purpose loans. These loans have no restrictions on their end-usage and are very useful for meeting your instant financial needs. | Since lenders take the risk of loaning you money without collateral, they charge high-interest rates on unsecured loans. Therefore, your monthly payments are likely to be much higher than on other secured loans. |
Also Read: Unsecured Personal Loan- How it Works
In addition to the merits and demerits of these loans, there are additional factors you should consider: your credit history is one of the major factors that determine your eligibility for unsecured loans. You are more likely to qualify and receive more attractive borrowing options with an average to above-average credit score. Likewise, if you have a good credit history, the lender may even offer you a lower interest rate. Before you decide to apply for an unsecured loan, make sure you understand the terms and conditions to make the strongest choices regarding your personal finances.