Stats across several countries have revealed that more consumers in the credit market opt for unsecured loans instead of secured credit lines. In other words, unsecured loans have way more outstanding value than options with collateral.
Norway is a prime example of where this scenario plays out. You can click here for more information on this. This common and recurring trend across several locations has led to several questions. One such is why most people opt for it.
High up on the list of reasons is that it requires no collateral. So, people without suitable collateral or unwilling to pledge an asset in exchange for a loan stand a chance with it.
However, are there other benefits as well as drawbacks of unsecured loans? You will find out about them provided you continue reading.
Benefits of Unsecured Loans
Unsecured loans are simply credit lines that can be secured without the need to pledge an asset as a security. Eligibility is solely or mostly based on the prospective borrower’s creditworthiness, which is usually determined by credit score and a couple of other things.
One of the most remarkable advantages is that they do not require anything of value in exchange for the loan, till repayment is completed. Some of the other benefits include the following:
Easier Access
The need for collateral is the striking difference between secured and unsecured loans. However, the former requires more than just having collateral as whatever asset is pledged must be considered suitable enough by the creditor.
Sadly, this turns out to be a challenge for some loan applicants. For example, many such applicants complain that their collateral is undervalued by the creditor.
The whole point here is that you would not have this issue with unsecured loans. This is as far as you are eligible enough for it.
No Risk of Asset Loss
Have you ever imagined why one is called secured and the other unsecured?
Well, this tag is described from the perception of the creditor/lender. Considering that secured loans require that a thing of significant value is pledged, it is more secure for the creditor. The reason is that there is something to hold onto if the borrower defaults.
While it is secured from the perspective of the creditor, the same cannot be said from the borrower’s perspective. This is because defaulting can lead to the loss of whatever asset is pledged.
Fortunately, this is not a worry with unsecured loans as no asset is pledged in exchange for the loan. However, this is not to say there are no severe consequences for defaulting. So, borrowers would still need to fulfill their obligations as enshrined in the agreed terms and conditions.
Quick Disbursement
The approval process for secured loans can be quite lengthy and hectic. This is mostly down to the important task of verifying or appraising the pledged asset, which is the basis for securing it in the first place.
Thankfully, it does not work that way with unsecured loans. As a result, they can be processed and funds sent to the borrower a lot faster. For the sake of clarity, all the processes for approval and disbursal can happen within 24 hours or a few days, at most.
However, there are proven tips for getting your unsecured loan application approved and disbursed as fast as possible. Some of the tips in question include the following:
- Credit Score Review – To ensure that you fit the eligibility bracket
- Gathering Required Documents – This includes documents of identification, employment verification, income proof, and debt information
- Choosing the Right Lender – Some options are better at quickly attending to applicants than others. However, this should not be your sole yardstick for choosing a lender
- Error-Free Application – Ensure that everything adds up to avoid being sidelined or thoroughly investigated
- Utilize Pre-Approval Features – If available
- Consider Applying with a Co-Signer – If your credit rating and/or history make you require it
- Early Application – Some moments are optimal and it is better to apply during such times
- Choose a Faster Fund Disbursement Option – Direct Deposit is a prime example of a fast disbursal option
- Leverage Technology – Apply online with BankID. This is faster than visiting the creditor’s physical office
By the way, the aforementioned do not only increase your chances of getting your application approved and funds disbursed quickly. They also ensure that you are approved in the first place as nothing happens until this happens. So, make sure to take the above-listed tips seriously.
Usage Flexibility
A lot of secured loans are tied to use for a specific purpose. Mortgage loans are prime examples. However, this is not how it is with most unsecured loans. Some of the common uses of these credit lines include:
- Loan Refinancing
- Vacation
- Automobile Purchase
- Home/Building Renovation Project
- Consumables – Such as cell phones, kitchen appliances, and television sets
It might interest you to know that some of the aforementioned accounts for more of the funds gotten through this credit line. You can check www.billigeforbrukslån.no/ for more information on this. Having made this clear, the fact that they offer usage flexibility does not mean they should be used irresponsibly.
Building Credit
Your credit score and history determine your chances of accessing several opportunities. Building a good credit score and history is therefore important for reasons that include the following:
- Employment Opportunities
- Access to Credit Facilities
- Access to Housing Opportunities – It proves how creditworthy you are to landlords. It also increases your chances of obtaining a mortgage
- Financial Flexibility
These and many others are reasons why building a good credit score and history is crucial. However, it all starts with responsible use of credit lines, which is why access is important.
Access is a lot easier with unsecured loans as mentioned above. So, this means that you get to easily and quickly build your credit score and history with this kind of credit line.
Drawbacks of Unsecured Loans
Unsecured loans have noteworthy benefits as seen above. However, your decision to obtain them would not be well-informed if you are not aware of their possible drawbacks. To this end, some of these possible drawbacks are discussed below:
Cost
They are unsecured credit lines from the perspective of creditors as mentioned earlier. As a result, creditors have to make up for the increased risk involved in offering such credit services.
This mostly explains why the cost of servicing them is usually higher than secured loans. In other words, they usually command a higher interest rate.
Eligibility Criteria
The fact that there is no need to worry about providing collateral is an advantage. However, this does not suggest that its eligibility requirement is a stroll in the park.
It might interest you to know that its eligibility requirement is even more stringent. For example, the applicant’s credit history matters a lot.
So, the application can be declined if the history is too brief, which is why responsible credit building with credit cards and other reasonable options is advised. Income verification is also another major part of what determines who is eligible or otherwise.
Borrowing Limits
The suitability of pledged assets is what determines borrowing limits with secured loans. However, internal (and sometimes external policies) determine borrowing limits with unsecured loans. This can be a huge challenge for people who need to secure substantial amounts.
Impact on Credit Score
A borrower’s credit score and history can be seriously affected if they do not make timely payments. This can cause challenges with securing credit lines in the future, among other things.
Debt Accumulation
The fact that these loans can be secured easily has become the financial downfall of some people. This is considering how some people have quickly found themselves in a debt crisis, having taken out too many such loans.
Repayment Terms
They often come with shorter repayment plans. This implies that borrowers end up having to make large monthly payments. The fact that they usually command higher interest rates does not make it any better.
