How Does An Unsecured Personal Loan Work?
Unsecured personal loans can be used for a range of purposes including purchasing assets for personal use.
The main feature of an unsecured loan is that you don’t have to provide any collateral as security to the lender (bank or finance company). This means that the lender does not have any rights to repossess an asset that you may purchase using the loan. As a result, lenders regard unsecured loans to be a higher risk to them and the interest rates charged are generally higher than they are for secured loans.
Who Does An Unsecured Personal Loan Suit?
Unsecured loans are commonly used by private individuals for personal use purchases.
Unsecured Personal Loans – Pros
Flexibility – You can use an unsecured personal for a combination of purposes. The amount that you borrow does not have to be used for just one purpose such as the purchase of an asset.
No Security – You do not have to provide an asset or property as security for the loan. If you use the loan to purchase an asset you can sell the asset at any time and you do not have to pay out the loan.
Lower Value Assets – If the asset has a low initial or potential resale value a lender may not be prepared to offer a secured loan. Unsecured personal loans can be useful in helping you to finance the purchase of lower value or older assets.
Inclusions – You can potentially include things like government fees, insurance premiums and accessories as part of your loan, so one repayment covers all of your costs.
Credit History – If you’re new to borrowing an unsecured personal loan can be a great way to get what you want and help establish a credit history for you which can come in useful down the track for things like mortgages.
Minus Equity – If you are trading in an asset which is financed and you owe more on the outstanding loan than the asset is worth you may be able to include this minus equity amount that you borrow for the unsecured personal loan.
Unsecured Personal Loans – Cons
Stricter Lending Criteria – Because the lender has no security to fall back on their criteria to qualify for an unsecured personal loan can be stricter than it is for a secured loan. It may be more difficult for you to get an unsecured personal loan and the lender may not be prepared to lend the full amount that you are looking to borrow.
Residual Value Unavailable – Because an unsecured personal loan is effectively a cash loan there is no option to have a residual value (balloon payment) to reduce the repayments.
Business Use – If you’re using the loan to purchase an asset which is used for predominantly business purposes then an unsecured personal loan is not the most effective option for you.