How Secured is Unsecured Personal Loan?

Unsecured personal loan seems to be the most enticing form of bank loan due to its leniency. There is no need to put assets (read: collateral) at risk with this type of loan. Rather, the lender relies on good credit history and trust that the borrower will follow the underwritten obligations. However, what people do not know is that rejections for unsecured personal loans comprise more than half of the total rejection cases for all types of loan in the US. Why is this so?

Being an unsecured personal loan doesn’t automatically secure approval for such application. Since banks base their decisions on trust and credit record, they scrutinize all past records, ability to pay and possibilities of shunning duties in the future. Lenders highly consider payment settlements in the past. Frequently, some companies also consider the income capacity of the borrower. More stringent policies are applied to this type of loan as banks’ risk of losing money from unpaid loans is also higher. With all the risks into consideration, the loanable amount in unsecured personal loan is relatively smaller with very limited negotiable terms. Moreover, some companies look for co-signers to back-up the contract in case the borrower shirks the responsibility to repay the loan.

The biggest pitfall of unsecured personal loans is its high interest rate. It can be up to 10% higher than secured personal loans. With this, borrowers are practically – and ironically – getting less secured chances of paying the debt.

Inauspiciously, if the need is very urgent, unsecured personal loan may not be the best choice. Unlike secured personal loans, this is subject to a more thorough credit investigation. It may take weeks before final decision is made (although it varies from company to company).

If with the given risks, the borrower is not able to comply with the conditions, he is also putting his credit rating at risk, which when marked with a bad credit record may consequentially affect future loan applications and credit standing. Likewise, if a co-signer is available, he is also put at risk of shouldering something that most likely than not, is technically not his responsibility to begin with. Western countries, like the US, strictly follow such provision. Meaning, acquiescence to be a co-signer is also agreeing to the transfer of responsibility.

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James Henry Abrina is an editor, writer, SEO specialist and currently a Corporate Communication Professional, Market Desk Strategist, Business Development Officer and Unit Head for Business Profiles Incorporated.

He currently specializes in security management and business intelligence. Together with the company, he advocates Business Continuity Planning to change how the Philippine business sector sees the definition of crisis response and management.

For more useful information, read his articles at Triond and Masscom Tutor. Or his EzineArticles page.