Unsecured loan - Advantages and Disadvantages: Are they worth the risk?
Are the benefits of unsecured loans worth the risk? In this article, we examine the advantages and disadvantages of unsecured loans. After weighing the pros and cons of unsecured loans, we’ll show you a solution allowing you to borrow money instantly without having to worry about high-interest rates or credit checks. Curious? Read on to learn more.
Scenario: Your car has broken down and you’ve got a pricey fix on your hands. But payday doesn’t fall until the end of the month.
Do you join the 13.72 million people in the U.S. who take out an unsecured loan each year?
There are many benefits of unsecured loans. It’s no wonder the number of people taking out unsecured loans has shot up to 30% in recent years.
With the option of quick online applications, payday advances, and credit cards, it has never been easier to borrow in the US.
But with more people taking out unsecured loans, a growing amount of people are finding themselves with life-altering debt.
To help you make an informed decision, we’re going to help you weigh out the advantages and disadvantages of unsecured loans, plain and simple.
What are unsecured loans?
A quick catch up in case you haven’t checked out our article on what unsecured loans are.
Unsecured loans are moderate sums of money (usually up to $25,000) that you can borrow with the promise that you will pay the money back plus interest at a later date.
Advantages of unsecured loans
Let’s dive into the advantages of unsecured loans.
1. No collateral
When you take out an unsecured loan, you aren’t borrowing against the value of your home or other assets. That means your home and personal belongings are not directly at risk if you default on the loan.
That said, if you are unable to repay your loans and are taken to court as a result, your lender can still potentially seize your assets, including your home.
2. Fixed interest rates
One of the greatest benefits of unsecured loans is that interest rates are usually fixed. This means that even if the bank raises the base interest rate they require on loans, the amount you have to pay back won’t be affected.
3. Access to smaller, faster loans
Because unsecured loans usually work with smaller amounts of money, many of them are strong options for money in a pinch.
If you are hit with an unexpected expense, instant access to a small loan can be a major advantage. You can take out a small loan without having to commit to longer repayment terms Just make sure you don’t take out more than you can repay!
Disadvantages of unsecured loans
In 2020, the sum of personal loans in the U.S. reached more than $143 billion. Although personal loans have gained popularity in recent years, the consequence is that more Americans are in debt than ever before. These are the main disadvantages of unsecured loans and how to avoid them.
1. Higher rates
As the risk for the lender is higher, the interest rates on unsecured loans tend to be higher. In the U.S. credit card can reach up to 24% APR without compounding. That means if you borrow $1,000 in an emergency, you could end up owing $1,240 in 12 months.
2. Caps on what you can borrow
As mentioned earlier, there are lower caps on what you can borrow when you take out an unsecured loan. This usually maxes out around $25,000.
3. Credit checks
The best unsecured loans are unilaterally only available to people with high credit scores. If you have a less than perfect credit score, you may be denied a loan or subjected to extortionate interest rates.
In some cases, credit checks can damage your credit score. Giving you a hit even if you decide against taking out the loan or are rejected.
4. High interest
Generally, interest rates are much higher on unsecured loans than other types. And the rates scale with your credit score and loan term.
If you plan on paying back your loan as soon as possible, you will likely be subject to higher interest rates. In fact, as a rule of thumb, the shorter the term, the higher the rates.
5. Risk of being sued
If you cannot pay back the loan, there is a risk that a lender will take you to court. If this happens, they might end up placing a lien on your assets which means you could lose your assets like your home should you not pay up.
6. Your credit score is at risk
If you default on a loan, your ability to take out unsecured loans in the future will be impacted. Your credit score also takes a big hit.
Fortunately, there’s an option that allows you to apply for instant loans with low-interest rates, even if you have a less than perfect credit score.
Avoid high-interest rates with MyConstant crypto-backed loans
As we have seen, unsecured loans have higher interest rates that can be crippling if left to accumulate.
Even unsecured P2P lending platforms like Prosper, meant to be a solution to high-interest rates on unsecured loans, charge up to 35.99% APR on top of an origination fee of up to 5%.
You need better options, and you may be able to find them with a new breed of secured lending.
At MyConstant, we aim to take the trust out of lending and we offer the best rates because of it.
- Low-interest rates starting at just 6% APR.
- Instant matching time for loans.
- Secure storage for your collateral
Apply for a fast personal loan with MyConstant today and see how you can do more with your money.