Unsecured Loan Basics
An unsecured loan is one way to get some money if you’re short on funds. It might not be the best way, however. Be sure to fully understand unsecured loans before you move forward.
Unsecured loans differ from mortgages or home equity loans. There is no property used as collateral for the loan. This makes the loan a bigger risk for the lender. Although that is the key characteristic of a personal loan, there are others.
Characteristics of an unsecured loan
- No collateral. An unsecured loan is not guaranteed by any kind of property, such as a home.
- Interest rates. Interest rates for unsecured loans are higher than secured loans (such as a mortgage or home equity loan), but are lower than most credit card rates.
- Fixed terms. An unsecured loan can be due at the end of a set term, in which case the interest rate is fixed.
- Revolving line of credit. Some unsecured loans can work as a revolving line of credit like a credit card. In this case the interest rate is variable.
- No tax benefits. The interest on an unsecured loan is not tax deductible.
Pros of unsecured loans
If you do not own a home or do not have much home equity; an unsecured loan may be your best choice if you need a loan. An unsecured loan that has a fixed rate and term forces you to be disciplined and pay the loan off within the set time frame — unlike a credit card which tempts you to continue spending. Also, the interest rate on an unsecured loan is lower than most credit card rates, although the credit card’s initial teaser rate may be lower.
Cons of unsecured loans
Unlike the interest on a loan tied to a home, the interest payments on an unsecured loan are not tax deductible. Also, rates can easily be over 10 percent on an unsecured loan. Mortgages and home equity loan rates are usually much lower than that. Therefore, you pay far more interest on an unsecured than you would on a home equity loan of the same size.
Sometimes, an unsecured loan actually is your best option. If you cannot get a secured loan, an unsecured loan is probably a better choice than a credit card. It all depends on your circumstances.
If you’re considering getting an unsecured loan, be sure to look at all of your options. Compare products from several different lenders. You can do this online, at websites like www.LendingTree.com. Different lenders have different fees for unsecured loans, so it is important to shop around and make sure you get the best possible deal. But remember, only take out an unsecured loan if you really need it – and be sure to use it wisely.