The Disadvantages of Unsecured Personal Loans

Unsecured personal loans are loans that are not backed with collateral, unlike a home equity line of credit or a second mortgage. The term unsecured personal loan is generally another term for a payday cash advance.

While there are some constructive uses for small unsecured personal loans, in most cases there are more disadvantages to unsecured personal loans than benefits. These loans can turn out to be quite costly if you do not take special care to follow their terms and conditions.

The biggest disadvantage of an unsecured personal loan is the interest rate. Because these loans are not secured the lender does not have much recourse or leverage if you default on this loans, so as a result the interest rate is going to be higher. Since many unsecured shot term loans are issued to people who have bad credit, the interest rate is substantially higher. Some of these loans have interest rates in excess of 1000 percent annually, but you have to keep in mind that these loans are usually repaid in less than a month.

Another drawback to unsecured personal loans is they tend to be habit forming. Many people will get into a cycle where they are paying one loan off and taking out another one almost as soon as the previous one is paid off. So, if you take a loan of $400 and you are paying $10 per hundred dollars to borrow that money and your repayment period is 2 weeks. You will pay $1040 in interest over the period of a year and still owe the original $400 that you borrowed.

Payday loans do have their place. If you are going to be charged late fees for making a late payment or a returned check charge for having insufficient funds, the amount of money it costs for an unsecured personal loan is going to be less than the fees for paying a credit card bill later or bouncing a check. This is the right time for a cash advance loan.