The Many Benefits of Unsecured Loans

Unsecured business loans are a type of borrowing where regular payments are made each month until the full amount is paid back. Because the loan isn’t tied to any security, the interest rates tend to be higher. But knowing when and how to use unsecured business loans can be the difference between success and failure for your business.

In this article, we explore unsecured loans, their advantages, and the types of businesses that may benefit from unsecured finance. We also discuss how easy unsecured loans are to get, and how they impact your credit rating.

Unsecured loans are becoming an increasingly popular option for consumers looking to borrow money. Unlike secured loans, unsecured loans do not require any collateral. This makes them more accessible to more people. Unsecured loans offer several key advantages that make them a smart choice in many situations.

What is an Unsecured Loan?

An unsecured loan is a type of personal loan that does not require the borrower to put up any assets as collateral This distinguishes them from secured loans like mortgages or auto loans, which require collateral in the form of the home or car that is being financed

With an unsecured loan, the lender is relying solely on the borrower’s creditworthiness and ability to repay when approving the loan. Common types of unsecured loans include personal loans, student loans, and credit cards.

Top 5 Benefits of Unsecured Loans

Here are some of the biggest advantages that unsecured loans offer

1. No Risk to Personal Property

The most obvious benefit of an unsecured loan is that you are not putting any of your possessions at risk if you default on the loan. With a secured loan like a mortgage or auto loan, defaulting could result in foreclosure or repossession of the home or car used as collateral.

With an unsecured loan, the lender cannot seize any of your property if you fail to repay the loan. Your credit score will still take a hit, but you won’t lose any of your belongings. This gives borrowers more flexibility if they do run into financial hardship.

2. The Application Process Is Simpler

When applying for a secured loan, you have to provide extensive documentation on the asset you are using as collateral, such as title paperwork for a car or home. The lender needs to verify you actually own the home or vehicle before approving the loan.

The application process for unsecured loans is much more straightforward. Lenders mainly look at your income, existing debts, and credit score to determine if you qualify. This streamlined application can mean faster approval times.

3. Available to More Borrowers

Since unsecured loans do not require tying up valuable assets as collateral, they are accessible to more people. Those who do not own a home or have substantial savings could still qualify for an unsecured personal loan based on their creditworthiness alone.

For example, a retiree who owns their home outright would likely not qualify for a home equity loan. But they may still be approved for an unsecured personal loan. Unsecured loans open up financing options for those with limited assets.

4. Can Get Funds Quickly

Time is often of the essence when borrowing money. Unsecured loans can provide access to funds more rapidly than secured loan options.

For a mortgage or auto loan, it takes time for lenders to appraise the property or vehicle and finalize all the paperwork. Unsecured loans have fewer hurdles, so you can complete the application and receive the loan proceeds in days or weeks rather than months. This quicker financing can be invaluable when facing pressing financial needs.

5. Use Funds for Any Purpose

Unsecured personal loans offer more flexibility than other types of financing that are restricted to specific uses. For instance, a mortgage must be used to purchase or refinance real estate and a student loan can only cover education expenses.

Conversely, unsecured personal loans give borrowers the freedom to use the money for virtually any purpose. You can use an unsecured personal loan to consolidate high-interest debt, finance home improvements, pay medical bills, take a vacation, or cover any other costs. This versatility makes them applicable to a wide range of borrowing needs.

Unsecured Loan Options

There are several different sources available for unsecured personal loans. Here are some of the most common places to get this type of financing:

Banks: National and local banks are a traditional source for personal loans. They tend to offer competitive rates for borrowers with good credit. Approval and funding may take longer than online lenders.
Online lenders: Many companies like LendingClub, Prosper, and BestEgg specialize in online personal loans. They provide a fast and convenient application process. However, interest rates might be higher.
Credit unions: Not-for-profit credit unions offer personal loans with low rates and fees. You need to become a member first, which requires paying a small one-time membership fee.
Peer-to-peer (P2P) lending: Websites like Upstart connect individual investors with borrowers. You may be able to get a loan with a thin credit file or unconventional income sources.
Retail lenders: Stores like Walmart and Best Buy extend personal loans that can only be used for purchases at their business. These retail loans Tend to have high interest rates.

What to Consider Before Getting an Unsecured Loan

Unsecured loans can be beneficial in many situations, but they do come with some drawbacks to weigh as well:

Higher interest rates: With no collateral to recover losses if you default, lenders view unsecured loans as riskier. So interest rates are generally higher than secured loans.
Lower loan amounts: Maximum loan amounts are lower for unsecured financing compared to secured options. Loan amounts under $15,000 are common.
Credit check required: Since unsecured loans are approved based on your creditworthiness, the lender will check your credit report. Too many inquiries can negatively impact your credit score.
Default consequences: While lenders cannot seize your assets, defaulting on an unsecured loan still damages your credit and could potentially lead to collection calls or lawsuit.

As with any loan, shop around with multiple lenders to compare interest rates and ensure you only borrow what you can comfortably afford to repay. Used judiciously, an unsecured personal loan can provide financing for your needs without putting your property at risk.

When Unsecured Loans Make Sense

Though secured loans work better for large borrowing needs like purchasing a home, unsecured loans offer advantages for other situations:

Consolidating high-interest debt – Unsecured personal loans typically have lower interest rates than credit cards. Transferring credit card balances to a personal loan saves money.
Unexpected expenses – Quick access to funds makes unsecured loans useful for covering unplanned costs like medical bills or car repairs.
Building credit – Taking out a small personal loan you can easily repay helps establish a positive credit history.
Smoothing irregular income – For those with uneven freelance or seasonal income, an unsecured loan provides cash flow assistance during slow periods.
Evading early withdrawal penalties – Accessing funds from 401(k)s or IRAs can trigger fees. An unsecured personal loan avoids these penalties.

Tips for Getting Approved

Even with no collateral, you can get approved for an unsecured personal loan by taking these steps:

Maintain a credit score over 670 or higher
Lower credit card balances to under 30% of limits
Verify there are no errors on your credit reports
Keep income stable and debt-to-income ratio under 40%
Have a few years of positive credit history
Provide proof of income to demonstrate repayment ability
Only apply for loan amounts you can reasonably afford

Following financial best practices will put you in a strong position to qualify for an unsecured loan with better rates.

Weigh Your Options Carefully

Unsecured loans can be a viable alternative to high-interest options like payday loans and credit cards. But relying on them too much can lead to a dangerous debt cycle. Borrowers with poor credit may pay exorbitantly high interest rates.

You should have a clear borrowing purpose and repayment plan before taking out an unsecured personal loan. Interest rates may be higher than secured debt, but unsecured loans have their place as part of a prudent borrowing strategy.

Advantages of an Unsecured Loan

The main advantage of unsecured business loans is that there is no need to put up any of your business’s – or your – assets. In the event of your business being unable to make repayments on the loan, the lender doesn’t have any claim over either the business’s or your property. They are also often quicker and less complex than secured loans, meaning capital can be accessed in a much shorter space of time.

But there are also other advantages of utilising an unsecured loan:

Higher loan amounts – While this might not seem logical, unsecured business funding doesn’t have an upper limit to it; secured funding is limited to the value of the assets secured to it. Unsecured loans don’t have this limitation, although the cost (interest rates) and repayment schedule will reflect larger loan amounts.

Easier to access – With less paperwork being required to value and assess assets, unsecured loans can be easier and quicker to get. It usually involves less documentation which can delay the acceptance of a loan application.

Additional flexibility – Having extra cash on hand and ready to use whenever you need is great great for when you need to purchase new IT software, a new hire, or need working capital, especially when it isn’t secured against your existing assets.

Building relationships – Obtaining an unsecured loan from a lender can help establish a relationship with a lender. This can help you further down the line when you need additional credit and you’ve already proven yourself and your business to be reliable.

How Unsecured Loans Work?

No collateral is provided in an unsecured loan, meaning that guarantee of repayment must be made through other means. A personal guarantee may be given instead of collateral, in which a guarantor (usually the company director) agrees to cover the cost of the loan if repayment is not otherwise possible.

There are a few key differences between unsecured and secured loans, but mainly that the latter relies on assets as collateral.

The Pros and Cons of Personal Loans

FAQ

What are the advantages and disadvantages of a unsecured?

Type of Loan	Advantages	Disadvantages
Unsecured Loans	Shorter repayment terms	Lower loan amounts available
	Faster application process	Higher interest rates
	Loan top ups available	Risk of negative impact on credit score

What are two disadvantages of unsecured loans?

Typically, interest rates on unsecured loans are higher than rates on secured loans because the lender has a higher risk level of the loan not being repaid. Unsecured loans may be difficult to obtain if you do not have much positive credit history or don’t have a regular income.

Is an unsecured loan better?

From the lender’s point of view, secured debt can be better because it is less risky. From the borrower’s point of view, secured debt carries the risk that they’ll have to forfeit their collateral if they can’t repay. On the plus side, however, it is more likely to come with a lower interest rate than unsecured debt.

Why do people get unsecured loans?

Pros of unsecured loans Fast access to funds. No risk of losing assets. Fewer borrowing restrictions. Competitive rates for those with strong credit.

Are unsecured loans better than secured loans?

Unsecured loans also come with higher interest rates and less favorable terms than their secured counterparts. Related: Unsecured vs. Secured Loans Unsecured loans typically range from $1,000 to $100,000, which you can use for a range of purposes.

Do unsecured personal loans charge higher interest rates?

Since unsecured personal loans are riskier than loans secured by property, lenders tend to charge higher interest rates. How much higher the rates are depends on your credit score and the amount of money you’re borrowing. As of May 2021 interest rates on unsecured personal loans ranged from 3% to 36%.

What are the advantages of unsecured loans & lines of credit?

Advantages of unsecured loans and lines of credit: When you apply for an unsecured loan or credit card, you won’t have to put down a cash deposit as collateral. If you default on an unsecured debt, the bank won’t be able to seize your assets. The application process is usually quick and painless.

Why should you get an unsecured loan?

Taking on debt can strain your finances, but if you need funds for a big upcoming expense, an unsecured loan can help. They have good credit. A high credit score unlocks more favorable unsecured loan terms and interest rates. They have reliable income.