For most bad credit borrowers, securing a financial injection can be the difference between continued financial woes and a return to a strong credit status. However, there is a certain challenge in getting approval when seeking an unsecured loan with bad credit. Lenders are simply more cautious about granting them.
But is it worth applying for this kind of loan when the chances of getting approval with no security are low, and the restrictions that come with such deals are sometimes severe? There are certainly pros and cons to the deal, though for some applicants, the pros are more than the cons.
Here are a few points that should be considered when applying for an unsecured loan, and which may cast light on the issue of whether the move will really be worth it.
Advantages of Unsecured Loans
There are three main advantages to seeking an unsecured loan with bad credit, though it should be noted that they come mainly when applying to an online lender. The first is that the application process is very quick. Online lenders have automated approval processes, so a decision can be received within minutes.
The second is that, because there is nothing offered up as collateral, no possession is placed at risk and cannot be lost in the event of the loan being defaulted upon. Granting approval with no security means the lender stands to lose out, not the borrower.
Finally, the lender practically always charges a fixed interest rate on the unsecured loan, so the repayments are a lot easier to budget for. Therefore, as long as there is sufficient income, the chances of defaulting on your loan repayments are very low.
Disadvantages of Unsecured Loans
There are also several disadvantages to taking on an unsecured loan with bad credit. For a start, the loan terms are going to be poor, with higher interest rates charged. How much higher than average the rates are will depend on the lender, with online lenders tending to be the most reasonable.
A second disadvantage is the size of the available loans. Lenders are willing to grant loan approval with no security on smaller loans, with larger loans considered too risky. Usually, the limit for a bad credit borrower is $5,000 – $10,000, with applicants with excellent credit histories expecting up to $25,000.
And finally, the term of the loan is usually kept short to lessen the period of time that the lender is vulnerable to default. So, a $5,000 unsecured loan might be repaid over 3 years. Some online lenders, however, are willing to grant $5,000 over 7 years, making the deal all the more affordable.
Choosing an Online Lender
There is a variety of lender options when it comes to seeking unsecured loan with bad credit, and some are better than others. Unfortunately, traditional lenders tend to offer the worst deals, mainly due to their over-cautious lending policies – especially these days.
Online lenders are known to offer the best deals because they specialize in bad credit lending. This means that they are more likely to grant approval with no security, and charge interest rates that are more competitive.
They are also willing to offer more flexible repayment schedules and, as is mentioned above, set longer repayment periods. However, bear in mind that this also means the amount of interest paid over the lifetime of the unsecured loan is usually larger.