Monday, May 5, 2014

Unsecured Loans Are No Longer the Preferred Option for Consumers

There was a time when banks and financial institutions placed considerable importance on selling unsecured loans to their customers. By the very nature of the loan an agreement, there were clear risks to them, but that mattered little. The very fact that the public did not have to hand over collateral to access some extra funds, made the product popular. But times have evidently changed.

Over the past decade, the popularity of unsecured personal loans as a product has waned, with most people showing a greater interest in credit cards in particular. The institutions cannot help but react by marketing the alternatives, but why a loan that is unsecured should lose its appeal so quickly is down to several reasons. Here are three in particular that stand out.

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Inflexible Terms

Arguably, the biggest reason is that unsecured loans come with quite inflexible terms that can be debilitating to a borrower. This is simply because the lenders want to have as much security as possible, which is somewhat understandable since there is no collateral with which to cover losses should the consumer default on their loan.

The flexibility that secured personal loans might have can be afforded to the consumer because security has already been set aside. So when it comes to lending to the consumer, the bank or financial institution can feel more confident and be less insistent.

With loans that are unsecured, however, there is usually a strict limit to the sum consumers are entitled to, while the schedule of repayments is strictly set out to end on a specific date, with little room to maneuver. What this means is that consumers are not actually getting the sum they need, or the terms that provide them with the maximum benefit.

On the other hand, secured loans tend to have a more relaxed repayment schedule and the fund limit available on a case by case basis rather than there being a fixed amount.

Public Awareness

One of the biggest problems is that the public is not completely aware of their chances of getting an unsecured loan. In fact, many people believe that such personal loans are no longer generally available, but are instead part of some sort of strategic marketing campaign, drawing consumers in with the promise of something more.

However, anyone can ask a bank about loans that are unsecured, and the options will become apparent. Of course, as mentioned, the terms can be strict but the ability to get a limited amount of cash is there.

True Value

Finally, it is a simple fact that banks and financial institutions get higher returns from credit card users than borrowers who make unsecured personal loans. This has as much to do with the popularity of these products as the terms of the agreement, but there is little doubt that marketing from the lending institutions has a lot to do with it too.

The returns from unsecured loans are simply not the same, even if there were to be a greater degree of marketing done. Between the poor profits, the greater risk, the apparent public preference for more flexible products and the general lack of enthusiasm means that loans that are unsecured come some way down the pecking order.

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