Seeking loans to help consolidate debt and cover everyday expenses has become more and more common in the last year. Considering the rate of inflation and the relative ease of acquiring loans through digitally-based companies, it’s no wonder why over 22 million Americans have one or more personal loans to their name.
There are various options available in the market for personal loans. One such option is an unstructured personal loan, sometimes called signature loans. But what exactly is an unstructured personal loan, and how does it differ from other types of loans?
Key Features of Unstructured Personal Loans
Bottom line: an unstructured personal loan is a type of loan that does not require collateral. Unlike a secured loan, where an asset (such as a car or a house) is used as collateral, an unstructured personal loan is granted based solely on the borrower’s creditworthiness and income. This makes it a popular choice for individuals who may not have valuable assets to pledge as collateral.
Here are some other key features of unstructured personal loans:
- Flexible use: Borrowers can use the loan amount for various purposes, including debt consolidation, home renovations, medical expenses, or even a dream vacation.
- Quick approval: Unstructured personal loans typically have a faster approval process compared to secured loans, as there is no need for asset valuation.
- Higher interest rates: Since unstructured personal loans are not backed by collateral, lenders often charge higher interest rates to compensate for the increased risk.
- Fixed or variable interest rates: Depending on the lender, unstructured personal loans may come with fixed interest rates, where the rate remains constant throughout the repayment period, or variable interest rates, where the rate can fluctuate based on market conditions.
- No collateral required: As mentioned earlier, unstructured personal loans do not require any collateral, making them accessible to a wider range of individuals.
The Pros & Cons of Unstructured Personal Loans
Unstructured personal loans offer both advantages and disadvantages for borrowers to consider:
- PRO: With no restrictions on the use of funds, borrowers have the flexibility to utilize the loan amount as per their needs and priorities.
- PRO: The absence of collateral evaluation and the streamlined approval process ensure that borrowers can access the funds quickly, helping them meet their financial requirements in a timely manner.
- PRO: Unstructured personal loans are relatively simple to understand and apply for. Borrowers do not need to provide extensive documentation or go through complex procedures.
- PRO: Successfully repaying an unstructured personal loan can help borrowers build their credit or improve their credit scores, creating more favorable financial opportunities in the future.
- CON: Lenders may have stricter eligibility criteria for unstructured personal loans. They typically require a higher credit score and stable income to qualify. If you have a less-than-perfect credit history or irregular income, you may find it challenging to secure an unstructured loan.
- CON: Unstructured personal loans often come with higher interest rates compared to secured loans. Lenders charge higher rates to compensate for the increased risk they assume by not having collateral. This means you may end up paying more in interest over the life of the loan.
- CON: Since unstructured personal loans are not backed by collateral, lenders may impose lower borrowing limits. This could restrict the amount of money you can borrow, limiting your ability to finance larger expenses.
- CON: Unstructured personal loans often come with shorter repayment terms compared to secured loans. This means you’ll have less time to repay the loan, leading to higher monthly payments. If you’re unable to meet the shorter repayment schedule, it could put a strain on your finances.
These types of loans are not administered freely, but your successful qualification doesn’t necessarily an unstructured personal loan is the best fit for your financial situation. It’s essential to carefully evaluate your needs, financial capabilities, and the terms of the loan before making a decision.
Final Considerations
Personal loans can be a great financial strategy for achieving realistic short-term goals. So, if you have a good credit score and stable income, unstructured personal loans could be a viable option for you. While it provides several benefits, it’s crucial to evaluate the interest rates and repayment terms before making a decision. Consider speaking with a financial advisor who can provide personalized guidance based on your circumstances and needs.
Have more questions about unstructured loans? Wondering if one may be a good fit for your needs or goals? At SouthEast Bank, we want to help! Visit your local branch or fill out an initial interest form to receive assistance from our team.
