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What Is An Unsecured Personal Loan?

Remember the sweet freedom of summer as a kid? That’s kind of what unsecured personal loans are like for your finances.

They’re some of the most versatile and flexible loans available because they don’t require an asset to back them.

However, unlike your carefree childhood summers, you can’t use them to fund your agenda of sleeping late, riding your bike all day, or losing your voice on the rollercoasters at Magic Mountain.

(Well technically you could, but we would advise against it).

Before we get into what you can use them for, we should mention that, because no collateral is needed, unsecured personal loans can be hard to obtain. Allow us to explain…


Understanding What Is An Unsecured Personal Loan

It might help to illustrate unsecured personal loans by comparing and contrasting them with the more distinguished-sounding secured personal loan.

Secured Personal Loans
A secured loan is one in which the lender requires the borrower to have some type of asset worth the value (or most of the value) of the loan.

A primary example of this is a mortgage. In this type of loan, if the borrower stops making payments, the lender can force the sale of the home to recoup some of its investment. This is why some lenders force foreclosures. It allows them to get some of their funds back if the borrower defaults.

Unsecured Personal Loans
Unsecured loans do not have this type of protection for the lender. There is no asset.

A credit card is an example of an unsecured loan (though most do not have the ability to borrow, repay, and borrow again). If a borrower defaults on this type of loan, the lender has more difficulty recouping its investment. The lender still can take legal action against the borrower including filing a judgment against you. Yet, it’s hard to obtain compensation.

Here’s another way to think about it. Unsecured loans are like your Uncle Gary, the perpetual bachelor who drives a corvette and can’t be tied down. Secured loans are like your dad: responsible, dependable, drives a sensible sedan.


Benefits Of Unsecured Personal Loans

Why should anyone consider an unsecured loan?

There are a few key advantages of unsecured personal loans.

1. There’s less risk to you, the borrower
The risk is on the lender with an unsecured personal loan. If the borrower is unsure he or she can make payment in the long term, there is no risk of losing a valuable asset.

2. You can dream big
When you obtain a mortgage, you can only use those funds to pay for a home.

However, with an unsecured loan, you can use the money any old way you choose. You know what that means? Time to get footloose and fancy-free! (Within reason. Keep it classy.)

3. You can consolidate your debt
“Paying off debt is easy!” said no one in history. Fortunately, unsecured personal loans can be a great tool to help you pay back the money you owe.

The new loan may have a lower interest rate or better terms. It may also require a lower monthly payment than making individual payments across numerous credit cards.


Disadvantages Of Unsecured Personal Loans

“I’m ready to stop reading and apply for a personal loan now!” you might be saying. While we love your enthusiasm, we wouldn’t be doing our due diligence if we didn’t also discuss the drawbacks that limit access to these types of loans for some borrowers.

1. They play hard to get
Larger unsecured loans are harder to obtain because of the risk they carry to lenders. If you default, getting their money back isn’t a sure thing.

As a result, lenders are a little more selective. Most often, you must have a good credit score, steady income, and a reliable credit history.

2. They may be a bit more expensive
The higher risk of unsecured personal loans means lenders are likely to charge more for them than a secured loan. However, they still tend to be more affordable than the interest and fees of a typical credit card, which can be straight-up redonkulous (official term of the financial industry).

Carefully weigh the costs associated with all options before making a decision.

3. You can’t always get what you want (or what you need)
The state-of-the-art toenail trimmer that you’re building in your garage might, according to your estimates, require an investment of $300K. Unfortunately, only lenders get to decide how much unsecured personal loan you receive. In some cases, they might only give you a fraction of what you need, which means your toenail business will have to wait.


Who Should Consider An Unsecured Personal Loan?

The first step in obtaining a loan is to speak to your lender openly about your goals. They can then make recommendations about which type of loan is best for you.

Not sure if an unsecured personal loan is for you? If you have good credit and the means to repay, here are some common reasons people apply for them:

  • Debt consolidation
  • Home improvements
  • Dream vacation
  • Paying off medical bills
  • Funding savings accounts or investments
  • Making a large (and responsible) purchase

Unsecured personal loans are gymnast-level flexible. That’s why people use them to accomplish a variety of goals. But you also need to think about how well they gel with your financial needs.


What To Look For In Unsecured Personal Loans

How much will the loan cost?

That’s a great question, and one you should definitely ask your lender. Unsecured personal loans should be compared based on the following:

  • How much you can borrow and how much you can pay each month
  • The interest rate expressed as an APR on the loan
  • The term or the length of time the loan will remain in place
  • Any closing costs or other fees, which are sometimes rolled into the loan itself

Take the time to learn about each one of these features. Crunch the numbers. If you’re feeling really productive, enter them in a spreadsheet of some kind. Do they add up to something you can afford?

After you’ve spreadsheeted, compare the figures to those of a secured loan. Seeing them side-by-side allows you to evaluate each one of your options and what you can expect to pay throughout the loan term.


Taking Out An Unsecured Personal Loan

The good news is that many lenders offer unsecured personal loans, including your local credit union.

It’s a proven fact by science that credit unions are awesome. They generally offer competitive rates and easier qualifications than other financial institutions, especially online lenders. And when it comes to harder-to-get unsecured personal loans, you may just have a better chance.

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