Published: September 3, 2018 | Updated: March 30, 2020 | Posted by: Venus Zoleta | Personal Loan
Which type of loan suits you better: unsecured loans or secured loans? On the surface, an unsecured loan seems a better choice because it has no collateral. But it isn’t as simple as that.
Before you borrow money, assess the positives versus the negatives of getting unsecured loans.
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Unsecured loans are a type of personal loan issued by commercial banks and private lenders that requires no collateral, meaning there’s no need to pledge a valuable property you own such as a car, house and/or lot, or even an ATM card to borrow money. Most lenders in the Philippines offer personal loans without collateral up to PHP 1 million payable in one to three years.
If you fail to pay off an unsecured loan, you won’t risk losing your personal or business asset that you declared as collateral.
This is the biggest advantage of unsecured loans over secured loans. If your loan is secured, the lender can repossess your car or foreclose your home to recover some of its losses from your unpaid loan. You won’t worry about repossession or foreclosure with an unsecured loan if you’re in a tight spot that makes it hard to repay a loan on time.
Let’s say you’re choosing between auto loans and personal loans to purchase a new car. With an auto loan, the loaned car becomes your collateral, and the bank can take it back when you stop making payments. On the other hand, defaulting on a no-collateral personal loan won’t end up in a car repossession.
If you declare collateral on your loan application, it will have to undergo an appraisal first to estimate its value. That involves more time and paperwork, as the lender uses the value of the collateral as a basis for deciding whether to approve a secured loan or not and how much you can borrow (The loan amount is a percentage of the collateral’s appraised value).
In contrast, an unsecured loan eliminates the need for a property appraisal. This is why unsecured loan providers, especially online lenders, can release loan proceeds within only 24 hours or a few days.
Secured loans such as housing loans and auto loans require a down payment of at least 20% of the property’s market value. That isn’t the case with unsecured loans, making them ideal for meeting immediate cash needs.
Unsecured loans in the Philippines are approved based on a borrower’s credit history, credit score, and income stability. This makes getting a no-collateral loan harder than a secured loan in two ways.
First, borrowers have to prove their ability to repay a loan by submitting a lot of financial documents required by the lender. The entire process—from obtaining all requirements and submitting them to scrutinizing and evaluating the documents—can take so much time. No matter how much effort you’ve put into preparing all the requirements, your loan application may still be denied.
Second, borrowers with a good credit score have better chances of an unsecured loan approval than those with a poor score or no credit history. If you have unpaid loans and credit card bills, lenders will find that out and reject your loan application.
The cost of borrowing is higher with unsecured loans. Their higher interest rates at shorter repayment periods raise the monthly loan repayments. It only makes sense. Without any collateral, lenders are at risk of incurring losses if a borrower defaults on an unsecured loan. Charging higher interest rates is a way to offset such a risk.
This becomes a huge setback when you don’t have enough cash flow and can’t afford your monthly repayments anymore. Once you stop repaying a loan, you’ll incur debt and a lower credit score. Also, it will be harder to get an approval for loans and credit cards in the future.
Another way personal loan providers reduce the risk of an unsecured loan default is lending smaller amounts, especially to borrowers with a low credit score. Thus, even if you’re approved for a no-collateral loan, the loan amount may not be enough to cover your specific financial need.
Whether you choose an unsecured loan or a secured loan, it’s important to shop around to find the best deals on personal loans in the Philippines. Compare lenders, loan features, interest rates, and requirements before you file a loan application.