Unsecured loan is a type of debt, given by a company or person to other people. In case the debtor is unable to pay the loan back, or even refuses to do it, the lender hasn’t got additional security. By this “security” term we mean particular assets as collateral.
This type is riskier for lenders, that’s why interest rates here are always higher than for secured loans. It’s a normal situation and debtors should understand it, there’s nothing to complain about, as higher interest rates appear as a way to insure against any risks of losing money.
Let’s point out the key thoughts:
- Unsecured debt is a loan that is not secured by collateral. It usually demands higher levels of interest rates as a compensation for any additional risk.
- Lenders also have their own way to cut down any risks. They may report default and then have a chance to sell their loans to 3rd parties, e.g. at the secondary loan market.
The main difference between secured and unsecured loans comes down to whether there are any additional assets involved or not. Any debt without collateral is unsecured: overdraft credit lines, credit cards, microloans (usually for small amounts).
Unsecured loans pose a particular risk to lenders as the borrower may decide not to repay the loan as a result of starting a bankruptcy procedure. If it happens, the lender may go to court with a claim against the debtor. But still, if the agreement doesn’t involve any points about assets, original investment in most cases would not be paid back. For lenders this case would call for hiring a collection agency, which would try to get back at least part of the outstanding bet.
But no one says that bankruptcy is a great way to avoid paying off. It never meant that anybody can get an unsecured loan and when it comes time to pay back – just initiate bankruptcy procedure. Those debtors, earlier filed for bankruptcy are close to never getting a new loan, or at least for many years.
Unsecured loans in South Africa
We carefully analysed all the unsecured loans in South Africa and made a general review of available offers:
- Lowest possible amount to borrow: R1000.
- Highest possible amount: R350.000.
- Average loan terms: From 30 days (the shortest possible) to 7 years (the longest possible).
- Interest rates: 20-25% (average), maximum – 27.5% per annum.
This information is given for personal loans, but there are some other types of loans in South Africa, like unsecured business loans, or unsecured debt consolidation loans. There, numbers could be slightly different.
Requirements for unsecured loans
It should be obvious that the set of requirements to qualify for an unsecured loan is wider and the requirements themselves are stricter. The reasons are clear: lenders don’t have an additional payback guarantee, as it happens with secured loans.
So, for unsecured personal loans in South Africa general list of requirements to qualify includes:
- South African citizenship, which can be proved with a country ID-card.
- 18 years of age (or older).
- Proof of official monthly income, allowing to safely cover monthly payments according to a required amount plus interest rates. In most cases – 3 months’ bank statement.
- Good credit history with no payback problems before.
This list is not a complete and strict one. It means that according to the terms and conditions of each lending company or even each loan rule, sets of requirements could be different. By the way, the list is not necessarily longer – for example, there are companies giving unsecured loans with no credit check at all, or accepting unsecured personal loans for those with bad credit history. There are even cases, when a company works with blacklisted clients of other lenders, accepting unsecured loans for them. But it’s a rare exception, and it should be clear, that such loans are risky for debtors, that’s why interest rates would be very high, available amounts are low, as well as loan terms are short.
Additional useful information for debtors
What’s especially great about unsecured loans is that there’s no need to pledge anything to borrow money. Your house, cars or anything stays with you and you don’t have to worry about it, staying at your property. But it still would be wise to apply for a loan only in case you really need money.
Each person applying for a loan should clearly realize that borrowed money is not free money, even though you get it with the money, just after filling application documents. You’re to pay back, what’s more – amount would be raised because of adding interest rates.
Let’s take a look at the list of situations, when applying for a loan would be wise, and sometimes – the only right decision:
Emergency cases. Never hesitate to borrow money to cover medical issues of your own and family and each person you care about.
Buying really essential items. Here we mean those, making your everyday life easier, and helping to reach your goals, like a laptop to work and study, or a car if you work in another town. Anything that makes your own life convenient.
Essential payments. Here we mean not only paying monthly bills, but paying for everything that's valuable for you. It could be a wedding or spending a holiday with family. If you’re sure that monthly payments would not cause any further troubles – why not?
Investments. Personal loans can easily become the amount of money to invest in something, you’re absolutely ensured to make more money for you. It’s ok to ask for starting money to invest in something that would start to benefit in a while. Just be careful with your investments, especially if you’re new to this sphere.
Debt consolidation. Even though there are separate types of loans, helping to deal with other debts consolidation, it’s still ok to use money from personal loans for such a type of purpose. Use money from a personal loan to cover already existing debts, which can make it much easier to manage.
Unsecured personal loans: pros and cons
Let’s take a look at the final pros and cons summary. Let’s start with the benefits:
- No need to leave assets as a payback guarantee, so you don’t risk losing any of your own possessions.
- Given money is available for any purpose.
- Often available even for those with poor credit history.
Unfortunately, there are also some disadvantages:
- Higher interest rates, if compared with secured loans.
- Usually lower amounts, as without additional payback security lenders can’t afford risking huge amounts.
- Longer and stricter requirements list (for the same reason – everything should be double-checked, whether a person is trustworthy to bring money back).
- Usually shorter terms to bring money back. But still, it depends on the reliability and financial possibilities of each person – sometimes it still can be possible to borrow money for 5 or 7 years.