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Ethiopian Economics Association

Ethiopian Economics Association

The Pros and Cons of Unsecured Loans

Pros and Cons

Unsecured loans are the ones that do not require any collateral. In contrast, a secured loan uses your property, a valuable object, or an auto title to guarantee loan repayment. The question here is whether it is worth borrowing money through an unsecured loan. Financial experts state that the choice depends on each case. Borrowers have two main choices when it comes to unsecured loans: personal loans and payday cash advances. The two options share standard features.

The most obvious advantage for unsecured loans is that they usually have a simplified application process compared to secured loans. Direct lenders that offer cash advances process applications within minutes. Personal loans from banks take longer. Unlike a title loan or home equity loan, an unsecured loan doesn’t jeopardize your goods. Your lender does not become the owner of your car, boat, or house when you don’t pay off your debt on time.

On the downside, a lender is authorized to take extra measures if you default on unsecured personal loans. In simple terms, if you don’t repay them on time, payday lenders can add extra fees, while traditional financial institutions could take you to court. Another disadvantage is that the amounts are smaller when you apply for an unsecured personal loan. Collateral would allow customers to access more funds, especially if they have a good credit score. Unsecured personal loans are considered riskier than secured loans, which is why lenders have higher rates and payments. On average, depending on the exact loan type and your details, applicants that qualify can expect to pay between 3% and 36%. Beware of hidden fees that may increase your interest rate.

Banks and credit unions will do a hard credit history check for unsecured loans and require a fair score to do business with you. Payday lenders will let you borrow money from them without having a perfect FICO score. With a direct lender, your income is one of the most important eligibility criteria. Moreover, small-dollar amounts will require a repayment term of up to one month.

To sum it up, financing your next purchase is possible through at least two types of unsecured loans. However, before proceeding with either of them, it’s worth sitting down and crunching the numbers. Ask yourself if you need a loan in the first place. Then decide whom you want to borrow from a bank or a direct lender. And finally, decide on the loan type: a cash advance for up to one month or an installment loan with monthly payments.