What You Should Know About Unsecured Personal Loans

Everyone encounters unexpected situations where they need additional cash. One way of getting the cash you need for emergency situations is through a personal unsecured loan. There are different types of unsecured loans, each with their own advantages and disadvantages. It pays to do your homework and know which loans are best for your situation before signing your name to any loan paperwork.

Types of Unsecured Loans

Unsecured loans are loans you can acquire without having to secure anything against the loans. Banks and credit unions are sources of unsecured loans. However, since the loans is not secured through any collateral, the lending institution is taking a greater risk than with a secured loan. For this reason, the amount you can borrow is usually less and you will pay a higher interest rate for the loan. Payday loans are also types of unsecured loans. With a payday loan, the lender will make a small personal loan to you until your next payday. Often, they will ask you to make out a check for the full amount of the loan, plus interest. If you do not pay the loan back when agreed, the payday loan company deposits your check. Payday loans come with very high interest rates and should be loans of last resort.

Advantages

One advantage of obtaining an unsecured loan is that you are not risking losing any assets or property if you are unable to pay back the loan. Lending criteria is not as stringent for unsecured loans. This means that people who do not qualify for traditional loans, may be able to obtain an unsecured loan. An unsecured loan may be cheaper than using a credit card for a cash advance as credit cards may have very high fees and interest rates for cash advances.

Disadvantages

Traditional banks are often unwilling to give short-term unsecured personal loans because of the risk they are undertaking. If you have very good credit, you may be able to obtain such a loan from a bank, but the interest rate may be very high. Payday loan lenders charge finance rates even higher than banks. They also allow you to extend your loan when it comes due by paying only the interest on the loan. If you continually pay only the interest due on the loan at renewal, it will take you a very long time to pay back the loan. You may even end up paying two or even three times the amount of the original loan.

Alternatives

It may be advantageous to you to consider alternatives to unsecured personal loans and avoid paying very high interest rates. Check with your banks and see if they offer an overdraft protection on your checking account. This is a line of credit than you will pay back to the bank in payments. Also consider establishing your own rainy day fund through a savings account that you can draw from in emergency situations. Perhaps relatives or friends may be able to extend a loan to you. If you must take out an unsecured personal loan, shop around for the best interest rates, loan terms, and repayment terms possible.

Sources:

Federal Trade Commission: Payday Loans Equal Very Costly Cash

Federal Deposit Insurance Corporation: When You Need Money Fast: Sources of Affordable Cash

Think Money Limited: Secured Loans vs. Unsecured Loans