An unsecured loan is a loan where you do not put up a collateral of property such as a home. This differentiates it from a secured loan such as a mortgage. There are many different types, with different terms, interest rates and conditions. Some of them have a fixed term and you must make straight payments, whereas others have a line of credit that is revolving with a variable interest rate. These loans have both advantages and disadvantages, which must be considered before a person agrees to one. The disadvantages of unsecured loans include the following points.
Interest rates are generally higher than secured loans
When you take out a secure loan, the lender has a safety net. If you do not pay back the loan, they can move to repossess the property. With an unsecured loan, the lender does not have this safety net. Because of that they want to get more for the loan, thus the interest rates are generally higher for this type of loan. Even a few percentage points can make a big difference in how much you pay, especially if you borrow a lot of money. According to Lending Tree, it is not uncommon to pay in excess of 10% interest on the money that you borrow.
Does not provide the tax benefits of other types of loans
Some loans have tax benefits that unsecured loans do not. For instance, a mortgage may allow you to deduct the interest payments from your taxes. This can add up to a substantial savings. Personal loans do not offer these perks, which can translate to a much more expensive loan for you.
If you have one with a fixed term, you will be forced to pay
Some people like the flexibility of credit cards that allows them to keep the debt going if they do not have the money to pay it back. If you get the type of unsecured loan that has a fixed term, you will have to keep up with it.
There are many disadvantages to unsecured loans. Of course, that does not mean that they are not ever good to get. While they may not have as low interest rates as secured loans, they generally have lower interest rates than credit cards, which for some people might be the only alternative. A lot of people do not have any property that they can offer as collateral and thus an unsecured loan may be the only type that they can get. Think about your needs to decide whether to tap into this financial tool.