What is an Unsecured Loan?

An unsecured loan is a form of debt taken out by a borrower that is not backed by any collateral and is repaid to the lender via installments. The repayment period can vary and the interest rates can vary but these loans tend to have worse terms than “secured loans” since they are considered to be riskier.

Are Unsecured Loans Good or Bad?

Good or bad are very relative. In terms of credit and a given consumer’s credit portfolio, unsecured loans are usually considered to be “bad debt”. As opposed to “good debt” like a mortgage, HELOC, auto loan, or other secured line of credit, etc. The underlying difference is that lenders tend to like secured debt obligations since the odds of repayment are much higher. In this regard, you’re likely to pay much more interest to borrow by using unsecured loans.

What Are Unsecured Loans Typically Used for?

Unsecured loans are a good idea when you need to finance purchases that are not backed by collateral. In some instances, this can be for financing a wedding, business expense, etc. They can also be used for consolidating credit card debt or even vacations (although this is typically not recommended).

How Can You Evaluate if Taking Out an Unsecured Loans is a Good Idea?

Our evaluations for unsecured loans should be no different than any other financial decision we make. The best way to evaluate whether making a financial move is a good idea or not is to evaluate the opportunity cost of your money and use an “opportunity cost framework” to add some science into that decision-making process. A different way of putting this, is making this financial move the best possible thing for you and your money? I.e. does this option help you achieve certain goals and if it does, is there another viable option that can help you achieve that goal for cheaper/less interest. This is how we can make better financial decisions.

What Else Should You Know About Unsecured Loans?

Drawbacks: Highest interest rate on any loan option (almost always). Origination fees and other finance costs that actually eat into the principal deposit you get in your bank account.

Basics: Unsecured loans are not backed by any assets or property. Therefore, they are the riskiest loans lenders will usually give to consumers (since if a consumer were to default they have little recourse for receiving repayment—no property to repossess, etc.). Due to this they also have higher interest rates (lenders need to make up for the increase in inherent risk).

Where to Get One: Your best bet is usually to get one from a local bank that you have an established relationship with. From my experience they will typically do the best by you. However, you can apply for one online quite easily and view any comparison site to compare rates, terms, parameters, etc.

Application Process: Pretty standard hard inquiry approval process. Origination fees and other finance costs will be included before the loan is deposited into your account.