Advantages and Disadvantages of No Collateral Personal Loans

When looking at loan options, there are two basic types – secured and unsecured. In a secured loan, you are required to offer some sort of collateral. Collateral is something that the lender can take possession of, should you fail to make your loan payments on time. Generally, collateral must be something that is worth a substantial amount of money. Some examples include a house or a car.

Sadly, there are some cases in which you may need a loan but have no collateral to offer. This can be because your valuable assets are already offered as collateral in a different loan or because you don’t own any items that can be used for collateral. This would require you to look for a no collateral loan, otherwise known as an unsecured loan.

There are both advantages and disadvantages to an unsecured loan. By understanding them, you can determine if this type of loan is right for you. It can also help you to know what you should expect from these types of loans before you sign on the dotted line.

Advantages to Unsecured Loans

Probably the biggest advantage to an unsecured loan is that you don’t need any type of collateral. This means that renters, homeowners, car owners, and non-car owners can all have an opportunity to receive loan funds. After all, not everyone has collateral to offer. Or, you may own an item that you could place for collateral, but you are still paying on it and don’t want an additional loan. Whatever your reason for wanting a no collateral loan, you won’t have to worry about any additional risk to your home or car when taking out a loan or being denied because you don’t own these items.

Another notable advantage to no collateral loans is that they are much faster to process. In some cases, you may even be able to get an instant approval. Because there is no deed or title to process or evaluate, processing time is very short. This can be especially true if you are borrowing a small amount of money. In most cases, a credit report, employment history verification, bank account verification, and reference verification is all that is needed. In some cases, you may be able to receive funds the very next business day.

Disadvantages of No Collateral Loans

Sadly, however, this is where the advantages of unsecured loans stop. There are many disadvantages of unsecured loans, particularly for individuals with bad credit. While it may be tempting to look at just the advantages, the disadvantages are an important part of making a smart loan decision.

In most cases, unsecured loans are directed towards individuals that only need to borrow a small amount of money. Without collateral, lenders are rarely willing to take a very big risk. More money, of course, means more risk. If you need to borrow a substantial amount of money, you may want to reconsider your loan plan. The higher risk affects more than just your loan amount, however.

Higher risk always means higher interest. Unsecured, no collateral loans are no different. Without collateral, your lender is basing their lending decision solely on trust and credit history. This can make unsecured loans almost scary for individuals with bad credit. While you may get approved with bad credit, you are likely to receive an interest rate that is substantially higher than you might have anticipated. Carefully consider whether you really need the loan now. If so, consider obtaining a co-signer or going for a secured loan to help reduce the interest rate that you would have to pay on your own with an unsecured personal loan.

Another disadvantage that many individuals are not aware of is that unsecured loans are often less flexible than secured loans. You are likely to find that you must pay a specific amount each month for a specific number of years. If you later decide that you want to pay more or can pay off the loan sooner, you are likely to experience serious prepayment penalties. This can sometimes cancel out any savings you have made from paying the loan off early.

To avoid getting blindsided by extra fees, like prepayment fees, carefully read the contract before you sign. This can help you understand what your terms are and any additional fees that you may face. Making the decision for the type of loan to take out can be a difficult process. However, for some, there are very few options. Be sure that you look at both sides of the coin, no matter how limited your options may seem. In the end, only you can make the right choice for your current and future financial needs.