The Pros And Cons Of Unsecured Cash Loans

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If you are strapped for money, an unsecured cash loan is one option that can provide you with fast cash. But what is an unsecured cash loan and what are the benefits and drawbacks of taking one out? The bottom line is that you should not take out an unsecured cash loan without a full understanding of what it is and what the pros and cons associated with it are.

What Is An Unsecured Cash Loan?

An unsecured cash loan is a loan that is not secured by any asset or property. Instead, unsecured cash loans are only secured by the promise of the borrower to repay the loan. If the borrower of an unsecured cash loan missed a loan payment, there are no assets for the lender to seize and sell to repay the loan.

Popular Types Of Unsecured Cash Loans

Payday Loans: A payday loan, also known as a cash advance, is a short term loan that will be repaid by your next paycheck. Payday loans are generally taken out by people who are in need of immediate income before their next paycheck arrives. They are relatively easy to obtain and often do not require a credit check. They are available online and in person at payday loan shops.

In general, a payday loan should only be taken out for emergency situations. This is because the interest rate on these loans can be astronomical. For example, you can end up paying an interest rate of up to 400 percent on a $100 loan. That is $500 that you have to repay for borrowing $100. Therefore, if you can avoid taking out a payday loan by finding another source of cheaper financing, do it. (To learn more, see The Pros And Cons Of Payday Loans.)

Credit Cards: Everyone knows what a credit card is. But not everyone realizes that credit cards are unsecured cash loans. Unlike traditional unsecured cash loans, credit cards offer a revolving line of credit. This means that you can continually borrow as much money as you want until you reach your credit limit. Once your credit limit is reached, you will have to pay back a portion of the borrowed funds before you can borrow additional money.

There is a lot of publicity on the dangers of abusing your credit cards. However, when used appropriately, there are many benefits to using a credit card. (For more information, see 7 Important Benefits Of Using A Credit Card.)

Student Loans: Student loans are another popular type of unsecured cash loan. They are used to finance the costs of higher education. Student loans can have an interest rate or have no interest rate attached to them. They can also be taken out from private sources or from government sources.

While student loans can be a great way to finance your college education, you should make sure not to put yourself into financial jeopardy to go to college. (To learn more about student loans, see A Guide To Applying For Student Loans.)

If you do end up in financial trouble because of student loan debt, there are some programs that may allow you to get rid of your student loans. (For more information, see A Guide On Federal Student Loan Forgiveness.)

Personal Loans: A personal loan is an unsecured cash loan from a bank, financial institution or individual. When you get financing to buy a television, you are taking out an unsecured personal loan. The same is true when you borrow money from a friend, family member or your bank. Like student loans, personal loans can have an interest rate or no interest rate attached to them.

Benefits Of Unsecured Cash Loans

  • They are relatively easy to get. Keep in mind that you will get approved faster and get better loan terms if you have a good credit profile.
  • You do not have to put an asset or assets on the line to get the money. This is helpful for those who do not have any meaningful financial assets to use as loan collateral.

Drawbacks Of Unsecured Cash Loans

  • You will have to pay a higher interest rate on an unsecured loan than you would on a secured loan. This is because the lender has no asset that it can sell to make up for a missed loan payment.
  • You will not be able to get as much money on an unsecured basis as you would on a secured basis. Again, this is because unsecured loans are deemed to be riskier than secured loans.
  • Unlike mortgage loans which are secured, the interest on unsecured loans is not tax deductible. If you have the option to open a home equity line of credit, you might do this instead of taking out an unsecured loan in order to receive the tax benefits. (For more information, see Helpful Advice On Taking Out A Second Home Loan Mortgage.)

If you are considering taking out an unsecured cash loan, make sure that you fully understand the pros and cons associated with these loans. The general rule of thumb is that if you can get a secured loan with good terms, you should probably not take out an unsecured cash loan. However, if you do end up taking on an unsecured loan, do your homework ahead of time to avoid negative financial repercussions down the road.

Last Updated: February 1, 2012
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About Michael Diaz Michael Diaz is a contributing author for CanDoFinance.com.

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