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What Is an Unsecured Line of Credit?

  • by Harita Solanki|
  • 0 Comment |
  • Updated: February 2, 2022 |
  • Credit

What is an unsecured line of credit?

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.

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