Advantages And Disadvantages Of Lack Of Security On Loans!

by Sarah Dinkins - Date: 2007-01-18 - Word Count: 495 Share This!

The unsecured nature of these loans attracts tenants but homeowners as well. However, in order to decide whether unsecured loans are the right option for you, you need to understand the advantages and disadvantages that the lack of security implies.

Lack of security (collateral) is the main characteristic that defines unsecured loans. When a loan is secured most of the risk that the lender incurs in by lending money is bestowed towards the property and ultimately the borrower. The risk that the lender takes is reduced due to the possibility of repossession that he has on the property being used as collateral

The lender knows that one way or another, he will recover his money. If the borrower repays the loan on time, the subsequent monthly payments will eventually cancel the loan. But if the borrower defaults on the loan, the lender can take legal action against the property and claim his money by selling the asset.

Advantages Of Lack of Security

The absence of security turns the risk of the transaction towards the lender. Though the lender can take legal action against the borrower in order to recover his money, if there is no collateral, the process is slower and he may or may not recover what he lent. Moreover, the legal charges for such processes are significantly higher than that of secured loans.

Qualification for those who are non-homeowners is possible and sometimes even those who are homeowners prefer to request unsecured loans in order to sleep secure knowing that their property is safe if anything happens and they miss a payment on the loan.

Approval for this kind of loan is also significantly faster. This is due to the fact that there is no property documentation required, no asset valuation and generally speaking, a lot less paperwork. Moreover, there are some banks that offer pre-approved unsecured personal loans that can be obtained just by clicking on the corresponding option at the bank's home banking internet site.

Disadvantages of Lack of Security

As regards the disadvantages, the main one is undoubtedly the higher costs that you'll have to pay for the money. Though the interests have descended, they are still a lot higher than the ones charged for secured loans. Comparing an unsecured loan with a secured loan you can often find out that for the same amount you'll be paying double or more the amount of interests with an unsecured loan.

The amount of money you can request is also limited. While with a secured loan you can request as much money as the value of the remaining equity on the property, unsecured loans have limited amounts that change according to the applicants credit score and history.

And last, but not least, meeting the requirements necessary for getting approved might not be so easy. Though the credit requirements have been reduced lately, they still exist and those with bad credit can only obtain loans with very high interest rates. And thus, the income requirements for approval are high too.

Related Tags: unsecured personal loans, lack of security on loans, lending money, advantages of lack of security


Sarah Dinkins is an Expert Loan Consultant in the financial industry that helps people to repair their credit and get approved for home loans, unsecured personal loans, student loans, consolidation loans, car loans and other types of loans and financial products. At she is continually adding new finance articles useful for those in need of professional advice.

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