Unsecured personal loans can be helpful for people who need money quickly, but they can also get you into trouble if you don’t know what you’re doing.
Unsecured personal loans are tough to get approved for.
You’ve probably heard that unsecured personal loans are more challenging to get approved for than other types of loans. But what does that mean, exactly?
An unsecured personal loan is where the lender doesn’t ask for any collateral or security against the borrower (you).
The main difference between secured and unsecured loans is that with a secured loan, you put up assets like your home or car as collateral.
If you don’t pay back your debt on time, the lender can take away these assets to cover their losses.
With an unsecured loan, there is no asset backing up your debt—which means if you default on payments, there aren’t any legal remedies available to recover any money owed by using those assets as collateral.
They carry very high-interest rates.
Considering taking out an unsecured personal loan, you should know that these loans come with high-interest rates.
If you borrow $10,000 and can only pay the minimum payment each month, it will take up to 30 years (and cost you over $40,000) before your debt is paid off.
Unsecured personal loans are also more expensive than secured loans like mortgages or auto loans; they’re also typically more costly than credit cards or other forms of financing, such as home equity lines of credit (HELOCs).
If you fail to make the payments, the lender can seize your assets.
If you miss a payment, the lender can seize your assets. They will not be shy and want to see that you are taking this seriously.
If you get behind on payments or don’t make them, they will seize your assets as quickly as possible to recoup their losses and feel more comfortable and relaxed at losing all their money.
The only thing worse than missing a payment is several consecutive payments in a row! If you do this, the lender has every right to seize any cash reserves or other liquid assets (e.g., stocks) that they have been holding onto until now—and there’s no telling if they’ll ever give them back again.
The lenders reserve the right to do anything that makes you feel more comfortable.
If you aren’t careful, the lenders will take advantage of your situation and make it seem like a good idea.
They’ll tell you that this is the only option available to you and that it’s better than any other option because they’ve done all the research for you.
They will say things like “this is a great investment” or “you’re doing the right thing” to ensure that you feel comfortable with what they say.
Lenders will attempt to make as much money from this as possible.
Lenders will attempt to make as much money from this as possible. Lending is a business, and they want their investment back.
The lender will try to increase the interest you pay, the length of your loan (to increase payments), and the number of payments (to increase fees).
In addition, many lenders initially offer short-term loans with low rates but will automatically renew your loan into one with higher APRs.
This can happen if you often miss one or two payments on time. If you don’t pay on time enough times in a row, some lenders may even turn off access to future loans without warning!
Be very wary of taking out an unsecured personal loan
An unsecured personal loan is a dangerous thing to take on. Here’s why:
Unsecured personal loans have high-interest rates because they aren’t backed by collateral. If you default on your payments, the lender can seize your assets; otherwise, there’s no guarantee that they’ll get back all of their money. This means lenders must charge higher interest rates to cover this risk.
Federal banking laws do not protect unsecured personal loans, meaning there’s no guarantee of repayment if something goes wrong with your finances (like an emergency or sudden illness).
Most banks and credit unions offer only secured loans with collateral, so it may be difficult to obtain any loan if you don’t have substantial savings or property to put up as collateral against the loan amount requested.
The takeaway is to be very wary of taking out an unsecured personal loan, which can have disastrous consequences for your finances and health.
If you decide this is the best course of action, make sure you know everything about what you’re getting into before signing on the dotted line.