On average, Americans have $41,600 in their bank accounts, which is a decent sum for large purchases.
But what if you don’t have that much in your own bank account? Or what if you want to buy something that costs more than that?
You can always fund your purchases with credit cards. However, these come with hefty interest rates.
Another option is personal loans, which come in secured and unsecured forms.
What is an unsecured personal loan and is it right for you? Read on to find out the answer and more!
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What Is an Unsecured Personal Loan?
An unsecured personal loan is a loan that’s based solely on your creditworthiness. This means that when you apply for one, you get either approved or denied, and that’s it.
On the other hand, a secured personal loan is more lenient, as it’s secured by collateral. Usually, you’ll use your car, house, or savings account balance as collateral here. For example, a title loan utilizes your car, so if you don’t repay the loan on time, the lender takes it.
Pros of Unsecured Loans
There are pros and cons for unsecured vs secured personal loans, so one isn’t definitively better than the other. But one of the most obvious pros of unsecured loans is there’s no risk to your personal property. If you’re unable to make payments, you don’t have to worry about vital things being taken away.
Also, the application process is simple. Lenders just need to check your credit score to determine if you’re worth loaning money to. Besides that, they might check for stable income, but that’s it.
Cons of Unsecured Personal Loans
Because there’s no collateral involved, you won’t be able to borrow as large an amount. This is even truer if you don’t have a great credit score, as you’re a bigger risk for non-payment.
In addition, to mitigate that risk, interest rates and payment amounts are larger than secured personal loans. Depending on your credit score/history and the lender, the interest rate can be as low as 3% or as high as 35%. But this is still lower than many credit cards, so it’s a better option than charging purchases on plastic.
And while there’s no collateral, that doesn’t mean you get off scot-free if you default on your loan. A lender can still sue you and place a lien on your assets. This can have a huge hit on your credit score.
Get a Loan Today
Now you know the answer to the question, “what is an unsecured personal loan”. It’s an ideal type of loan if you aren’t comfortable putting up your assets as collateral.
Just make sure that you read all the fine print before you sign for a loan. That way, you can avoid any nasty surprises later on!
To learn more about personal loans and other financial options, browse the rest of our blog page.