No matter the borrowing need there is a loan to fit the situation. When there is no available collateral an unsecured loan will allow the potential borrower access to a loan without having to place a lien upon a piece of property.
While this may sound like a great idea- a personal loan without having to risk anything in return- there are a few things to consider.
Qualifications
These loans are not typically available to just anybody. The qualifications for an unsecured loan tend to be much stricter than for a secured loan.
From a lending standpoint this makes absolute sense, a loan that does not provide collateral is far riskier than a secured loan that does provide collateral. Therefore the borrower will need to be better qualified for an unsecured loan.
There are companies that deal specifically with individual who cannot qualify for an unsecured loan. These companies offer what are commonly called bad credit loans. The rate on these loans can be substantially higher than what another financing company will chare and there is still no guarantee of qualification.
Rate
Unsecured loans typically have a higher cost than secured loans. Again, this is due to the increased risk that a lender assumes when there is no collateral for the loan.
The rate on a personal unsecured loan can be substantially higher than on a secured loan, even when the borrower does have excellent credit.
Then there is the matter of fees. An unsecured loan generally comes with some fees attached. The fee is always worked into the APR, so while shopping comparing APR’s across companies will ensure you find the best price.
Tightening credit conditions
In the 2008 global economy credit standards have become very tight. This means that even with excellent credit it may be difficult to obtain any loan; whether secured or unsecured. These economic conditions make getting approved for an unsecured loan even harder. Bad credit loans too are becoming harder to find.
If there is nothing available for collateral an unsecured loan may be the only way to go in order to acquire financing. They do not require any kind of collateral making them riskier for lenders and more expensive for borrowers.
There are always options when looking for financing, but consider your options carefully. Don’t get stuck paying a high rate and high fees unnecessarily, particularly when you have collateral available that can help you get a better deal.