Unsecured Loans FAQ
An unsecured loan is often what people refer to when they talk about "personal loans". These financial products are small, fixed-rate loans that are taken out for a range of personal uses - often offered for between one and seven years, at amounts between £1,000 and £25,000.
Unlike with secured loans where assets are used to secure the lending, unsecured loans require borrowers to have a moderately fair credit score in order to obtain a good deal.
However, people without good credit ratings can still sometimes obtain an unsecured loan - for instance, with the help of a guarantor.
What is an unsecured loan?
An unsecured loan is a basic personal loan that is not linked to any of your assets, such as your home or car. This is the alternate option to a "secured" loan, wherein something of value is offered up as a guarantee for the lender in case you are unable to make the agreed-upon repayments.
Though no assets are placed at risk with an unsecured loan, you may still face legal actions and other problems if you do not pay the money owed.
What are the pros and cons of unsecured loans?
Unsecured loans can represent a cheap and simple way to obtain the cash you need in a hurry. They also offer plenty of flexibility when it comes to choosing how you want to repay them, as most borrowers offer fixed repayment terms between one and five years in length.
Some loans will even offer the option of "payment holidays" towards the start of an agreement so the borrower will not have to pay interest for a number of months.
The biggest negative point about unsecured loans is that the repayments are often a lot more expensive than they will be with secured loans, because there's nothing there to offer security to the lender if you don't make repayments.
>Am I a good candidate for an unsecured loan?
The best candidates for unsecured loans tend to be people with high credit ratings, people who have lived at the same address for an extended period of time, people with good job security, and those who have a good relationship with the bank they're hoping to take the loan out with. For instance, existing customers are likely to get better deals from a lender with whom they already hold a current account.
How much interest will I need to pay?
The interest charged on your loan will depend on a number of factors, including:
- The amount you borrow (larger amounts come with lower rates of interest in most situations)
- The term of the loan
- Your personal circumstances (credit history)
The better your credit history is, the more likely it is that you'll be eligible for the best interest rates offered by providers.
How much should I borrow?
As with all loans, you should only borrow what you can afford to repay with an unsecured loan. Draw up a monthly budget, and determine how much you can afford to give back each month.
If you find that you're struggling with repayments, remember not to ignore the problem - seek out help as quickly as possible.
How can I get the best deal on my unsecured loan?
Unsecured loans are offered by most banks and lenders, including peer-to-peer companies today. In order to get the best deal, it's important to shop around for the terms and APR that best suit your needs.
Don't simply settle for the first offer you find, as new deals are brought onto the market by competing companies on a regular basis.