Unsecured personal loans refer to the sum of money you borrow without putting up collateral. The lending decision is made after perusing your credit score and current income sources. Here are the features of these loans:
- Personal loans are subject to high interest rates. They are more expensive than secured loans.
- The borrowing amount could vary between €3,000 and €10,000.
- The loan is paid at fixed interest rates.
- The repayment term is set between 1 and 5 years.
What benefits do unsecured loans offer?
Here are some of the benefits of personal loans:
- No collateral is required
You do not need to secure personal loans against any collateral, which normally include your home or car. These loans are especially suitable for those who do not own a home or who do not feel comfortable putting up their house at risk.
In case you fall behind on payment or make a default, a lender cannot repossess your asset.
- Quick disbursal
The process of unsecured loans is quite fast. Lenders quickly run an affordability check, and once this part of the application process is done, you are disbursed money.
If the loan amount is less than €1,000, you obtain the money the same day. For a large amount, it takes two days to complete the process.
- Interest rates remain fixed throughout the term
A personal loan is approved at a fixed interest rate. It means the size of monthly payments will remain the same. This gives you peace of mind as you can easily create a budget around these payments.
- They help with improving your credit score
If your credit rating is not perfect, unsecured personal loans in Ireland can help ameliorate your credit score. By paying down the debt over a long period, you demonstrate that you adhere to payment schedules despite the ups and downs in your financial condition.
How do unsecured loans differ from secured loans?
Here are the reasons how unsecured loans are distinguished from secured loans:
| Unsecured loans | Secured loans |
| The collateral is absent. Despite a large sum of money, no property is secured against the loan. | Your house or any other valuable personal assets will be secured against the borrowed money. |
| Your personal assets remain safe despite a missed payment. | You will lose your property in case of default. |
| Interest rates are high compared to secured loans. | Interest rates are lower than those for personal loans. |
| You must have a good credit score to be eligible for lower interest rates. | Interest rates will remain competitive in spite of a poor credit score, as they are secured. |
| No documents are required if the amount is exiguous. The approval is made the same day. | Documents are required. The approval takes a couple of days. |
When the size of unsecured loans is not more than €1,000, they are required to be discharged at one shot. The repayment length for these loans does not exceed 14 days. Such loans are normally aimed at funding emergencies and therefore are disbursed the same day. This is why these loans are called instant cash loans too.
Which one to choose if you are given a choice?
It is generally not possible to choose one over another, as both types of loans are entirely different and are aimed at funding different needs. However, sometimes, the loan amount falls in a moderate range. In that case, you might be tempted to choose between collateral and personal loans.
Choosing an unsecured personal loan could be a wiser move as:
- Your property remains immune from repossession. Even if it becomes difficult to keep up with payments, you know that your lender will not turn to your assets.
- The turnaround for these loans is faster than that of collateral loans because minimal documents are required. They are particularly ideal for emergencies.
Though you do not have to bear the risk of losing your property, it does not insinuate that defaults and late payments have no repercussions. Your credit score will be damaged. Persistently ignoring payments will result in collection from debt collection agencies. This will severely damage your credit rating, especially if you are sued.
Things that affect the cost of unsecured loans
The cost of unsecured loans is completely reliant on the following factors:
- Your credit score: A solid credit rating will help you qualify for attractive interest rates. Subprime borrowers are charged high interest rates because of a high default risk.
- The loan term: shorter repayment terms cost you less money as compared to long terms.
- The loan amount: lenders usually charge lower interest rates for small loans, as they are more manageable to pay back.
Do not forget that you will have to pay fees and associated charges as well. Each lender has different interest rates and fees. Compare them before signing a loan agreement.
What drawbacks come with unsecured personal loans?
Here are the drawbacks of unsecured loans:
- They are expensive
Even if your credit rating is stellar, interest rates for personal loans are usually high. They are even higher for subprime borrowers. This is because lenders bear more risk as they do not have collateral to repossess in case you fail to meet your obligation. They try to make up for the loss by charging high interest rates.
- Lower borrowing amount
You may not be able to borrow a large sum of money. Even though personal loans could be approved up to €10,000, most lenders would hesitate to lend that much regardless of your credit rating. It could be challenging for you to meet larger obligations with these loans due to stricter approval criteria.
- Early repayment charges
If you tend to repay the debt before time, you will be imposed early repayment charges. It is likely that early settlement charges will offset your savings on interest.
- The risk of falling into debt
If you fail to accurately evaluate your repayment capacity, you will most likely fall behind on payments. If it happens, interest will keep accruing. Eventually, you will sink into debt.
Things to avoid when taking out unsecured personal loans
Here are a few things you should avoid while applying for unsecured loans:
| Things to avoid | Explanation |
| Not calculating your credit score | First, you should determine whether your score is good, and whether your lender accepts applications with that score. Otherwise, you will be rejected, and this will damage your credit score. |
| Not evaluating your affordability | You should carefully estimate how much you can pay back as borrowing more than that would result in a debt spiral. |
| Not paying attention to loan terms | Carefully scrutinise the loan term and its impact on the total cost of the loan. Try choosing shorter repayment lengths. |
The final word
Unsecured personal loans can help you meet various types of purposes, from emergencies such as a car repair to planned expenses like a wedding and a vacation. These loans can also help you consolidate your current outstanding debts.
However, at the same time, you should be quite careful when using these loans. Borrow money when you need funds for unavoidable reasons, and your repayment capacity is assured beyond doubt.