A look at the merits and demerits of unsecured loans

Are you at a crossroad as to whether to apply for unsecured loans? Do you wish to apply for unsecured loans but have scanty information on the loan product? If yes, then read on and enlighten yourself on the merits and demerits of unsecured loans.

Merits of unsecured loans

Unsecured loans are available to anyone

It doesn’t matter whether you are a tenant or a homeowner. Anyone is at will to apply for unsecured loans irrespective of their stature in the society.

Faster approval

Less paperwork and time needed to assess would be collateral means that unsecured loans are approved in record time. In fact, since there is less paperwork, individuals can apply and receive cash within 24 hours.

Credit score not determinant on approval or rejection

The beauty of unsecured loans is that you do not need to have an outstanding credit score before you can be considered. Even individuals with bad credit can apply and get approved for unsecured loans. However, the secret in positively impacting ones credit score lies in meeting debt obligations without fail.

Demerits of unsecured loans


High interest rates

If there is anything unattractive about unsecured loans, it has to do with the fact that unsecured loans attract high interest rates. Lenders charge high interest rates as a way of shielding themselves against risk. They find high interest rates the right mitigation in the absence of collateral. The rule of thumb when it comes to unsecured loans is that the higher the risk, the higher the cost of borrowing. If the lender has nothing to fall back on should you default, the next best alternative is for them to charge high interest rates which unfortunately makes unsecured loans expensive than secured loans.


Limited access to loan amounts

Unsecured loans are short term, have high risk, and therefore tend to extend a limited amount of cash to borrowers. Unsecured loans are normally extended to you in small amounts and therefore are instrumental for emergency purposes such as clearing an emergency hospital bill, repairing a car and what not. If you need a substantial amount of money say for business capital, unsecured loans are not for you. The amount you get might not be sufficient to meet your needs.


Short repayment period

Unlike secured loans that have a longer repayment period, unsecured loans are short term loans and therefore have short repayment periods. In most cases, inability to repay the loan means that the money in your bank account might automatically be deducted to service the loan. There is also the risk of getting deeper into debt and negatively impacting your credit score.

Debt rut

While unsecured loans are convenient and approval for the same fast, the truth of the matter is that should you be unable to meet debt obligation, you stand the risk of getting into a debt rut. The high interest rates and penalties could see your loan skyrocketing and making it difficult for you to get out of debt. Additionally, there are lenders who charge a penalty for early repayment which of course is a disadvantage to a person seeking to clear the loan as soon as possible.