There are times when you need to borrow some money for whatever reason and your thoughts will turn to how you can get the cash required, which is when the idea of a loan will come into your thoughts.
Borrowing money is not always a bad thing to do but it’s sometimes not the best thing to do either, which is why you need to weigh up the pros and cons and decide whether a loan is a right thing for you in the circumstances.
Here is a look at the main pros and cons to consider when it comes to unsecured loans, including an overview of the risk difference between secured and unsecured borrowing, why you get a quicker decision, and tips on weighing up the advantages and risks of taking out a personal loan.
A certain degree of risk
It is obvious to say that you should never consider taking out a loan that you can’t repay or could struggle to maintain the payments on.
If you are trying to borrow money for a business venture, for example, you would normally search around to see what business loan rates are on offer, and you may be asked for collateral as security against the loan, or it might be offered as an unsecured form of lending.
Whatever the reason for your personal borrowing requirement, the two main types of loan available are unsecured and secured, and there is a big difference to understand and appreciate between the two.
One of the big advantages in favor of an unsecured loan is that you are not risking a major asset like your home when you borrow the money. There are serious consequences to not paying the loan back, such as legal action and a default on your credit file but at least the risk is managed.
If you don’t pay back a secured loan you risk losing major assets as a consequence, so the obvious plus point for unsecured loans is that there is not the immediate risk to your property.
Another positive point in favor of unsecured loans is that the application process is often a lot quicker and more simplified than a secured loan request.
You can often get approved and even get the money in your bank account within a day or so.
It will take much longer than that to process a secured loan as you have to provide details of the collateral you are offering and the lender will want to get a valuation and do all the extra paperwork required to stake a claim in return for the money they are lending you.
Rates reflect the risk
Unsecured loans represent a greater risk to lenders as they have no collateral against the loan to fall back on, which is why you will normally find the interest rates charged are higher compared to a secured loan, and the repayments will also be larger because you will often be paying the loan back over a shorter period.
There are definite pros and cons to borrowing money via a personal loan and there are some advantages to unsecured loans and disadvantages to consider as well.
The main point to remember is that you should always consider the consequences of taking out a plan as well as the benefits, then decide whether an unsecured loan is the best route to take.
Love Counting My Pennies?
Sign up to get our latest content by email.