Unsecured Bad Credit Loans – Things to Consider
Despite your bad credit history, you’ve probably heard that one of the best ways to repair your credit is by having credit. It’s a bit of a catch-22 situation, though. If you have bad credit, lenders are hesitant to give you access to more money; but without it, you can’t repair your credit score. One way to get around this is by getting a bad credit loan, either secured or unsecured. Most people would prefer to have an unsecured loan, but there are pros and cons to starting out this way.
The Pros (Advantages) of an Unsecured Loan
No Collateral. One of the biggest advantages of an unsecured bad credit loan is the lack of collateral. With a secured loan, you would have to put up a cash deposit or give some other type of property (like your car title or home mortgage) so that the bank would have an asset to take if you defaulted. Unsecured loans take this hassle out of the equation.
Quick Application. Unsecured loans do have a rather quick application process. The bank has set criteria they look for and if you provide all of the documentation they need at the start it will take very little time for you to get an answer. You can often have your cash (or a denial) within a few days.
Fixed Interest Rates. Unsecured loans usually come with a fixed interest rate. No matter how high the rate is due to your credit score, that rate will not fluctuate throughout the term of your loan. Your payments will be the same every month.
The Cons (Disadvantages) of Unsecured Loans
High Interest Rates. Despite your interest rates being fixed, they’re going to be higher than they would be with a secured loan. Your poor credit score means you’ll automatically be paying a higher interest rate from the start. Opting for an unsecured loan can make it even higher and in some cases that means your payments won’t be easy to make each month.
Limitations on Borrowing Amounts. If you have collateral, like with a secured loan, you can borrow up to the value of that asset. With an unsecured loan, the bank has nothing to take back if you do not make payments. They are therefore less willing to lend you large sums of money. Unsecured loans are really only good for short-term needs, like immediate medical care or a major household repair.
Repayment Terms. The repayment terms with an unsecured loan are usually very strict. Your lender will set a specific period of time within which you must finish repaying your debt. They will mandate a specific payment amount each month. To make matters worse, some lenders will charge you an extra penalty for paying off your loan in advance.
Repairing your credit score and taking care of your financial business should be your number one priority. Just make sure you take the time to weigh the pros and cons of secured and unsecured bad credit loans. The former may seem like a pain in terms of assets, but the latter can get you into a ton of trouble with fees and penalties as well!
About the Author: Patty Kleen is a full-time writer with a passion for personal finance. She enjoys helping those with poor credit histories make changes so that they can have a brighter financial future.