What drawbacks should borrowers consider when deciding whether to take out an unsecured loan?
The main drawback of an unsecured loan is often the fact that it’s unsecured. This means a borrower failing to make a payment or allowing their account to fall into default has no insurance against the missed payment. Consequently, these missed payments will be reflected on the borrower’s credit history, and influence their credit score.
As there is no collateral against an unsecured loan, the borrower may feel more pressure to ensure repayment obligations are met, while repaying an unsecured personal loan over an extended period can be also be a source of pressure. However, a borrower should ensure they are able to meet their repayment obligations when applying for and accepting a loan in the first place. If a repayment is missed, the borrower should contact their lender and look to deal with the situation as soon as possible.
The drawbacks of an unsecured loan can be largely avoided through the borrower planning repayments and ensuring the loan terms work within their personal circumstances.
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