Discussing your previous financial difficulties can be both uncomfortable and daunting, especially if you have a less-than-desirable credit score. Due to the fact that an increasingly high number of people find themselves in the predicament of holding poor credit rating, financial service providers have created a new type of financial aid –all aimed at people who have already been refused a loan. Therefore, whether your predicament is due to missed utility payments, bereavement or simply a regrettable accumulation of debt, unsecured loans for bad credit may provide you with the emergency finance you require. This is particularly true for individuals who although have struggled in the past, are deliberately and relentlessly working to get their finances back on track.
The Fundamentals of Unsecured Loans
Before diving in and exploring the advantages and disadvantages of unsecured loans for bad credit, it's imperative to fully understand what the financial term actually signifies. An unsecured loan is a type of loan that is supported only by the borrower's creditworthiness, rather than by any type of collateral (i.e. car, house). Due to the fact that it is obtained without having a property as a collateral, unsecured loans are sometimes also referred to as personal or signature loans. Although it's both easier and more desirable to have a high credit rating in order to obtain unsecured loans, there are multiple lenders who are willing to look past your less-than-perfect credit score. Find out more on how to get an unsecured loan with bad credit.
The term 'bad credit' is known to make certain individuals uncomfortable and even apprehensive in seeking help. However, this ambiguous term is simply used to define a credit score which is less-than-desirable. Nevertheless, in the business world, your credit report is associated with a number rather than a denomination (i.e. good, bad, excellent); and that is not the final determinant either. While your associating number may paint a picture of your previous financial health, many lenders will still take the time to advise you of your options, one of which includes unsecured loans for bad credit.
These so-called 'bad credit loans' are clearly designed for individuals who are looking for financial help but have a poor credit history. Nonetheless, it's crucial to understand the ins-and-outs of unsecured loans before making a decision, weighing in both the advantages and disadvantages of this type of financial aid.
It is also important to differentiate between a less-than-perfect credit score and no credit history. The latter is a common issue for younger individuals who have never had a credit card and haven't been able to build up a credit rating –otherwise known as having a thin credit file.
The Pros of Unsecured Personal Loans
No Risk to Personal Property
Due to the fact that for unsecured personal loans you don't require declaring any property as collateral, there is little to no-risk for you. In comparison, when a personal loan is secured, it's backed by collateral that your lender can take off you, should you become unable to pay off your loan.
Therefore, one of the main advantages of unsecured personal loans is that your personal property isn't at risk in the event of a default. In other words, it won't be a possibility for you to lose your home or any other assets (i.e. car, jewellery). However, you are still responsible and liable for making timely payments!
It's always wise to use an eligibility tool before applying for any loan so that you can get an idea of your chances of success.
The Application Process Is Simpler
Taking into account that unsecured loans are commonly offered by other lenders besides banks and credit unions, the application process is significantly simplified. Case in point, you are able to apply for a loan from a peer-to-peer lender, all from the comfort of your own home. Additionally, in some circumstances, it's even possible to get the loan approved within 24-hours or less.
Unsecured loans can offer additional Flexibility
Because unsecured loans can offer small amounts of money, this financial proposition can be an ideal equity-injection for businesses which need a certain amount, as quickly as possible. According to financial advisors, the most effective type of unsecured loan is a working capital line of credit. That is due to the flexibility the service offers (i.e. borrow a certain amount when needed, pay it back within months, then borrow it again should you deem it necessary). You may also wish to use our site to find out how to get an unsecured loan to consolidate debt
The Cons of Unsecured Personal Loans
Loan Amounts May Be Smaller
Due to the fact that unsecured loans for bad credit present themselves as a higher-risk investment for the lender rather than the borrower, the amount which is given to you tends to be smaller. That's why lenders go to great lengths to limit the risk of a default. This is especially true if your credit score is low, as lenders tend to verify employment statuses and credit reports.
Rates and Payments Are Higher
As previously mentioned, unsecured personal loans are high-risk investments for lenders. To put this into perspective, consider this scenario: the loan is not backed by collateral (i.e. assets) and if the borrower fails to pay it back, the lender simply loses the money and gets nothing in return. Because this is a potential reality, lenders charge high-interest rates to justify the risk. How much higher will depend on both your credit score and the amount you want to borrow.
Additionally, it's vital to note that lender may hide a portion of the rates (i.e. application fee), and that's why you should always discuss any hidden fees before signing off a loan. That is essential in understanding if the monthly payment amount is within your paying-off capabilities because certain loans include substantial late payment penalties.
Damaging you (and your business) name
This situation will only arise in the event that you fail to repay the loan you have taken. This predicament can also affect your ability to obtain further financing, in addition to also damaging your credit score.
Should I take out an unsecured loan?
As discussed, unsecured personal loans have both advantages and disadvantages. While the decision will ultimately belong to you, it's important to understand what you may gain from getting a personal loan, and also what you might stand to lose.