Pros & Cons Of Unsecured Loans

Unsecured Loans
Just when you thought there was enough money to last for the month, an unforeseen debt rears its head. All of a sudden, it’s the middle of the month and you’ve only got a small amount to last until the first. It’s tempting to turn to a loan in your time of need, especially one which is unsecured.

A cash injection is an excellent way to boost your budget and avoid missing payments. However, it’s also a way to get into more debt, the type which can be very destructive. As you can see, there are pros and cons to unsecured loans so it’s essential to understand the basics before filling out an application.

What is an Unsecured Loan?

Before getting into the positives and negatives, let’s take a look at the definition. What are unsecured loans? An unsecured loan is a loan that is issued and supported only by the borrower’s creditworthiness, rather than by any type of collateral.

Unsecured loans, sometimes referred to as signature or personal loans, are obtained without the use of a property as collateral. The terms are often contingent on the borrower’s credit score.

The Pros

No Risk To Assets

A loan such as a mortgage will secure the property against the advance. That way, if the homeowner falls behind on the payments, the lender can take the building to recover their losses. Often, this leaves people homeless and without anywhere to go as the bank has repossessed their home.

Thankfully, this isn’t an issue with an unsecured loan. Because there aren’t any assets involved, there is nothing the lender can take from you as part of the deal. That includes everything from the property to your car and your business.

If you are late with the repayments, there is no extra pressure to find the money and get into more debt.

Applying For An Unsecured Loan


In the past, the local bank manager held the future of your finances in the palm of their hand. Today, there are various platforms which provide unsecured loans that are regulated. Take a credit union as an example. Their deals center on small balances with low to medium interest rates for people who aren’t financially stable.

Alternatively, there are peer-to-peer lending sites which provide access to trustworthy lenders, such as payday lenders. It’s even acceptable to ask a friend or family member for an advance to help you through the month. After all, a family loan shouldn’t come with hidden fees and extortionate rates of interest.

The result: there is no need to rely on the establishment any longer. Anyone who needs an unsecured loan can find it with the click of a button.

Cons Of Unsecured Loans

Credit Scores For Unsecured Loan

Credit Score Dependent

Although there are plenty of offerings, they aren’t straightforward to obtain. The reason why is that of your credit score. An unsecured loan uses a person’s rating to determine if they are eligible. The majority of lenders are more likely to individuals with a lower rating.

Sure, it is possible to improve your credit score with the right techniques. However, it takes time to register and not everyone can afford to wait months to apply again. In many ways, this can leave applicants worse off than at the beginning. This is typically when people turn to loan sharks.

If you want to secure an unsecured loan, it’s essential to take care of your credit rating.

Amounts Are Typically Lower

Okay, you’ve got through the process and a lender has signed on the dotted line. But, the amount offered isn’t what you expected. If anything, it’s thousands of dollars short of the mark, which is a massive problem. Typically, the amount of unsecured loans isn’t very high because the bank needs to recover the money to make a profit. So, they limit the balance to ensure the risk isn’t as great.

This has two effects. The first is that you may have to apply for a secured loan anyway. So, you can waste time, money and energy in the process. Secondly, the rates and payments are very high. On average, an unsecured loan cost more than a secured loan.

For example, a mortgage may only be $300 a month compared to a personal loan of $550. Why? This is because of the payment terms on each.

Make Your Choice

There is no doubt unsecured loans have their advantages. However, it’s important to consider how much you need and the rate of repayment before signing on the dotted line. Otherwise, a secured option may be a better choice.

About Kelly Stone

Kelly is a graduate of Northwestern University's Kellogg School of Management with a Master's Degree in Finance. Kelly has 20+ years experience in the short-term lending industry since 1996, having owned 50 storefronts offering payday loans. As President of Snappy Payday Loans, Kelly has built a large network of lenders and is dedicated to ensuring consumers nationwide can find the loan they are seeking. View More