What Are the Advantages and Disadvantages of Collateral Vs Non Collateral Loans

There are those moments when you can find yourself in need of fast cash and not just small amount but something large and you do not have collateral to place as security. A signature loan as the name suggests is just that- the signature is the assurance that you will repay and not default the credit facility. While this is a common loan, on the other hand, it is a complicated option for both the borrower and the financial institution.

The benefits derived from this credit facility do not always compensate or pay off for the added expenses. In is factual that consumers who do not have assets experience difficulties in getting approval for loans. There are people who are simply not comfortable in placing their personal assets as security for credit facilities. If you are that type of a person, then these loans can be a good option.

But because you either do not want to give collateral for a debt or you have no asset to offer, then you generally have to pay the price in form of high interest rates. Nonetheless, if the loans are managed properly, they can help in increasing the credit score. Any attempt to default the payment could hurt your credit score badly.

Many of the financial institutions will require that you place collateral as security for a credit facility you are applying for. While people with assets will get credit facilities like car loans or home loans, which are typically secured, for those people who do not have these kinds of assets, they might have little choice.

And, there are many people who are in such critical problems and financial institutions have failed to address the financial needs of such people with no assets or low ownership of assets that they can place as security for credit facility. However, the signature loans are helping people despite their lack of equity. These loans offer a lower risk to the borrower because there is no actual asset that is placed on the line of credit.

Even if you do not repay the amount, though you may be taken to court, you may not be ordered to surrender your asset since you did not promise that in the first place. This is particularly important in a situation where you are experiencing a bankruptcy.

On the other side of the coin, these types of loans attract higher financing fees. In order to cater for the risks associated with the unsecured loan, lenders tend to charge higher fees. This is one way of ensuring that the principal amount is repaid soonest possible thus reducing the risk on the side of the lender.

It is also rare to find a signature loan that stretches more than 5 years, and this is in an attempt to try and recover the loan as soon as possible and protect the lender against the risks involved in the lending. Typically, there are higher monthly repayments because of the short term of repayment.