No matter how carefully you plan your finances, unexpected
events in life can make your entire financial planning go
awry. Since you may need money anytime and anywhere, you can
get approved for a set amount of money and withdraw it when
you need it with a
line of credit loan.
Unlike an installment loan, you can borrow a line of credit
at any time within the maximum
credit limit
and repay the loan to help you borrow again when emergencies
come your way. This way, you can avoid borrowing more than
you need, saving the
interest
which you would have incurred had you pulled out your entire
line of credit loan.
Now, you will find both secured and unsecured forms of a
line of credit. With an unsecured line of credit, you can be
ready for any unexpected expense without the risk of losing
your asset or property. While a
secured line of credit
also comes with its own set of benefits, we're here to tell
you everything you need to know about an unsecured personal
line of credit to make your financial life more manageable.
What is an Unsecured Line of Credit?
When we talk about an unsecured line of credit, the best
example that comes to our mind is credit cards which are not
guaranteed by any asset. In simple words, an unsecured line
of credit is a flexible financing option that doesn't
require collateral security and allows you to withdraw money
multiple times when needed within your approved limit. This
means you won't have to fill out a new application every
time you need to borrow funds from your unsecured line of
credit balance. By making minimum payments or paying off
your entire outstanding credit card balances at the end of
each month, you can restore your credit limit to help you
make as many withdrawals as you like.
You would be wondering if an unsecured line of credit does
not require any collateral to be approved, then what do
lenders check when you apply for this loan. Usually, lenders
approve your line of credit loan and provide a credit limit
based on your ability to repay. Some lenders check your
credit score, and some offer an unsecured personal line of
credit even with a poor credit history. Once you get
approved, you can enjoy quick access to funds on an ongoing
basis.
What are the Pros and Cons of Unsecured Lines of Credit?
There are various advantages and disadvantages to choosing
an unsecured line of credit. You can make your decision of
applying for our personal line of credit by carefully
weighing the below pros and cons:
Pros
-
You don't need to own or pledge any assets as collateral
to secure the loan.
-
This is considered a quick and convenient way to meet
fluctuating cash needs.
-
An unsecured line of credit comes with flexible payment
options and affordable interest rates.
-
These loans often don't have a term limit or end date and
fall under an
open-ended credit
category.
Cons
-
It would be best if you had good credit to qualify for an
unsecured line of credit.
-
They offer comparatively lower borrowing limits which may
not work best to pay for significant, one-time expenses.
-
Such credit options are riskier for lenders due to the
absence of collateral, and therefore, the interest rates
tend to be a little higher.
When Should I Choose an Unsecured Line of Credit?
Although you can use the funds you borrow using an unsecured
personal line of credit for any purpose, you won't be able
to use it for expenses exceeding the credit limit. For
instance, you can use this type of credit line to finance
your home repairs or renovation but not for purchasing your
house. You can pay for the unexpected expense immediately
with a personal line of credit and spread the cost over
several months by scheduling your payments.
Unlike an
installment loan, you can apply for a line of credit once and withdraw cash
multiple times as you need it. This feature makes them ideal
for financial emergencies when you don't have time to
complete the entire loan application process. So clearly,
you can choose an unsecured line of credit depending on the
purpose of borrowing and the amount of funds you require.
All in all, you can turn using an unsecured line of credit
into an excellent lending option if you know when exactly
they work best.