Unsecured Personal Loans: Should You Consider Them?

Written by Marc Adrian

Bills pile up and unforeseen events which call for some extra cash happens can cause a huge dent in our wallets. This is a real-world problem that many of us are unprepared for. So, what do we do? It’s that moment in our lives where we have to incur some debts.

While debt is not exactly a good sign of “adulting,” it isn’t a bad thing either if we just know how to manage. Otherwise, it will dig a deeper hole in our pockets. Contrary to what many people think, managing debt starts with choosing the right loan provider – it’s basically half of the equation!

Juggling your personal loan together with your other financial obligations doesn’t just start when you’re paying it, but rather when you start applying for one.

Here’s a quick rundown on unsecured loans, their advantages, and drawbacks as well as where to find them to help you get started.

What are unsecured personal loans?

This type of loan is given by a bank or a lending institution without asking for a collateral from the borrower. Unsecured loans are granted upon the borrower’s creditworthiness, which will solely rely on a person’s credit history.

Since there’s no system yet that keeps track of a person’s credit record in the Philippines, institutions run their own credit investigation (CI) which will require a list of documentation to be provided by the borrower.

Who offer these loans?

In the Philippines, there are three (3) kinds of financial establishments that offer unsecured loans, each of them may offer different payment term and varying interest rates.

Depending on which establishment, the process of applying for a personal loan application can vary from easy to difficult

Banks

There are various financial products offered by banks in the Philippines, and unsecured personal loans make up one of their financial products.

However, unsecured loans from banks are out of reach of many applicants even if they are account holders of the bank where they already have an account.

However, this does not mean that loan applicants who are non-accountholders of the bank are automatically disqualified. With sufficient documents and proof of your financial capacity, it’s possible to get approved for a bank loan from a bank even if you are not a current customer.

Multi-purpose cooperatives

This type of financial establishment is an organization or group that provides licensed private financial services to consumers such as savings and investment, different types of loans, and perks aligned with the cooperative’s main business to extend support to a certain group or community.

Some multi-cooperatives extend membership to the general public, while some limit their membership to people who are employees of its parent corporation.

Private lending companies

Private lending companies are financial establishments that grant all types of basic loans. They are more straightforward with their loan services and their requirement, making them a good alternative for almost everyone who needs quick cash in the Philippines.

While banks offer more flexible repayment options and a wider range of financial products, lending companies provide wider accessibility of their products and services.

Also, they process loan applications faster, even though there is actually still paperwork involved just like a bank loan.

The downside to unsecured personal loans

Unsecured personal loan holds no real risk for the borrowers compared to secured loans. However, they do have their own share of disadvantages that calls for some compromise from the borrower.

Steep interest rates

Because of the risk that comes with unsecured loans for lenders, the interest rates are usually higher and the term isn’t as flexible as secured loans.

Unsecured loans usually come with interest rates twice as high as a secured loan, but some lenders will determine your interest rates based on your credit standing.

Even with that, their interest rates are still steep compared to secured loans because unsecured loans still hold a risk of getting defaulted by the borrowers.

A low initial loan amount

Loan amounts for first-time applicants may also be lower, depending on the establishment. Some lenders will require the borrower to start with a lower amount of loans and will provide increments on the succeeding loans once the initial one is successfully paid.

This is to establish trust and to test the borrower’s capacity to pay without risking a bigger amount of money. Apparently, getting qualified for this type of loan will build trust, which doesn’t really come cheap (literally).

While this isn’t exactly the case for banks, this holds true to many unsecured personal loans offered by other financial institutions.

Detailed screening process

Due to the country’s lack of a centralized credit record system, many private financial establishments in the Philippines do their own credit check, better known as credit investigation (CI). A representative from these financial institutions will be personally visiting the home of the loan applicants and conduct interviews with household members, and to some extent even speak to their neighbors.

While banks don’t necessarily carry out this step, this screening process is practiced by many private lenders in the country who are dominating the unsecured loan market in the Philippines. If you are uncomfortable with such a process, you may need to think twice before applying for one, or better yet pursue a loan from banks.

Payment collection can also be pervasive for some private lending institutions. Compared to banks who will simply send you a letter from some law firm, demanding for payment, private lending companies may come knocking at your door (literally) to ask for their money due. If not, they’ll bombard you with text messages or phone calls until you settle your missed payment. So, be prepared if you decide to go down this route.

Short-term loan

Depending on who’s granting the unsecured loan, it may start out as a short-term loan because it will either come with a 3 or 6 months payment term, or the amount may be small enough to be considered as such (₱10,000 to ₱20,000).  

Either way, short-term loans aren’t always the best source of lump sum money for big-ticket projects that entails a sizeable funding.

Should you apply for one?

The answer here lies on where you will be sourcing your unsecured loan, whether or not you can deal with the unfriendly payment terms and how you’ll be using the money.

Banks remain to be the most competitive provider of such financial product, but the chances of getting approved can be quite slim if you do not have a good banking record.  If you have the means to get approved for an unsecured loan from a bank, it remains the best option.

Multi-purpose cooperatives, on the other hand, have their own terms, and most of them can be as competitive as banks. However, not everyone has access to such, and even if it’s accessible to consumers, it will entail a certain period of membership before a loan can be granted.

Unsecured loans from these lenders are good and can have quite friendly terms and interest rates, but, you can only access such loan if you’re an existing member of a multi-purpose cooperative that extends personal loans to their member. If you aren’t one and you need cash, fast, loans from them aren’t one to even consider.

Private lending companies, on the other hand, are the most consumer-friendly loan providers in the market today. However, be prepared to face higher interest rates, less flexible payment terms, and a somewhat pervasive screening process.  On the bright side, you can easily apply for their loan online (it’s paperless!) and get approved in as fast as 24 hours.

Applying for an unsecured loan might suit your current needs, just as long as you do the homework to ensure it is within your financial capacity. Just remember to choose one that is not only appropriate for your status quo but will also give you less financial dilemmas in the long run.

This article was first published in February 2020 and has been updated for freshness, accuracy and comprehensiveness.