When you take out an unsecured loan you sign a formal agreement to pay the loan back within a set period of time but you are not required to offer any collateral – that is, if you default on the loan the lender cannot seize any of your property to help pay off the debt. A simple example of an unsecured loan is buying something using your credit card. When you authorise payment using your card, you are entering into an agreement to pay back the money you have borrowed based on the contract you signed when you took out the card initially.
If the loan is not paid within the agreed time, additional fees may be charged, the account may be placed in the hands of debt collectors, and legal proceedings may be instigated against you.
Advantages of Unsecured Personal Loans
- Unsecured loans can be incredibly quick to arrange – within 24 hours in some cases
- You are not at risk of losing any property if you don’t repay your debt as agreed
- No restrictions are imposed on how you spend the money
- Paying an unsecured loan responsibly can help you to repair a damaged credit rating
Disadvantages of Unsecured Personal Loans
- Interest rates are much higher than with a secured loan
- You cannot borrow as much money as with a secured loan
If in doubt, always take advice from an independent financial advisor.