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What are the risks and benefits of unsecured loans?

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moneyFor some people that are down on their luck, secured loans aren’t always an option. Short term financial emergencies don’t often wait for long-winded loan applications and not everyone owns assets that they can use as collateral. While unsecured loans are often spoken of with caution and suspicion, unsecured loans aren’t a kiss of death for your financial security. As it is when applying for any type of loan, you can protect your finances and minimise risks by researching carefully the loan you are applying for and adhering to the terms and conditions that your lender provides.

If you are thinking about applying for an unsecured loan – whether for personal reasons or to fund a business – there are a few thigs that you will need to think about carefully. One of these things is whether or not the risks of unsecured loans outweigh the benefits:

 

The Risks

High Interest Rates

High interest rates are one of the most notable risks of unsecured loans that you need to look out for. Most unsecured loan providers have such high interest rates because they typically lend on a short term basis. While the APR on these types of loans can look shocking when you see it, when you keep a loan for a period of 3 to 6 months you won’t see anywhere near the amount of interest as you might expect. If you pay back your loan on time or early then you won’t feel the effect s of high interest too badly, but if you miss payments or skip them, then interest can quite easily rack up and get you in hot water.

 

Limited

When you apply for unsecured loans you don’t get the same amount of freedom that you might do with a secured loan. Whereas you can sometimes negotiate the terms of your loan with secured loan providers even after receiving your funds, unsecured loan providers typically have fixed terms and apply limitations on how much they will lend you. This isn’t typically a problem if you read the terms carefully and agree to them, but if you agree to the terms of a loan without fully understanding them, you can expect to be disappointed when you can’t adjust your monthly payments or defer a payment.

 

The Benefits

Widely Available

Unlike most secured loans that require you to pass strict checks that examine your eligibility, your credit score, your financial situation and your employment situation and require you to have valuable assets to use as collateral, unsecured loans are a lot easier to access. While most if not all unsecured lenders are required to perform mandatory checks, such as credit score and affordability checks, they ultimately get to decide for themselves whether you are eligible for a loan and do not adhere to the same strict and unwavering guidelines as most secured loan providers. They also don’t require you to have any assets of near or equal value to your loan amount to use as collateral, so even if you don’t have a car or home, you can still apply for an unsecured loan.

 

Fast

Unsecured loans are fast to apply for, process and deliver. There are many places where you can apply for payday loans online, which requires you to fill out a short application form for the chance for your loan request to be approved and your funds delivered to you on the same day as you submit your form. If you are stuck in a financial emergency and need some fast cash, an unsecured loan is the fastest way to get it, and paying it back is fast as well. The most popular unsecured loans are short term and are paid back in small monthly instalments over a period of a few months. That means that you can pay off your loan quickly and many providers will let you make payments early or pay the loan back in full when you can to avoid collecting interest.

Contributors

Contributors

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