What is an unsecured loan?
An unsecured loan is one that is dependent on your credit score, rather than on collateral. Generally, a lender will also consider your general overall status as well as the amount borrowed. It is also called a personal loan or a signature loan. This can often make them slightly riskier and means that lenders may prefer applicants with a higher credit score, or only offer small amounts. This is normally in the region of £1,000-25,000.
What are the benefits of an unsecured loan?
- You may be able to borrow more than with a credit card.
- Your loan repayments will be for a fixed amount each month which makes it easier to budget.
- The interest rates are generally fixed.
- It can work well if you are looking to consolidate your debts into one less expensive loan.
- You can choose the time taken to repay the loan.
What are the disadvantages of an unsecured loan?
As unsecured loans are deemed slightly riskier than secured loan products, they have a number of drawbacks including:
- Higher Interest Rates.
- Less time to repay.
- Most banks won’t lend less than £1,000 so you might end up borrowing more than you need.
- As the interest rates reduce decrease depending on the amount you borrow, you might be tempted to take out a bigger loan than you need.
Will I be charged for repaying my loan early?
Often, an unsecured loan will have a penalty for an early repayment fee. However, you will need to speak to your lender to understand the full details involved with your particular agreement.
Are there better alternatives to an unsecured loan?
Depending on your circumstances, if you are considering an alternative to an unsecured loan you may be better off with a credit card. However, the maximum overdraft you can typically have on a credit card is £5,000 (although this does depend on your credit score). This means that if you are looking for more than £5,000 – you will need to take out a loan. Another challenge with credit cards is that certain retailers won’t accept them – most notably car dealerships. Which means they are unsuitable for some purposes.
What factors affect your ability to get an unsecured loan?
There are two main factors which affect eligibility:
- Credit history – a good to excellent credit score will make it far more likely that you will not only get a good loan, but also reduce the amount of interest you will have to pay.
- Income – A lender will want to view not only your income but also your other outgoings (for example your rent or mortgage payments.) This means that even if you have a strong credit score, but your income isn’t deemed as suitable, you may get refused a loan a lender won’t offer you a loan.
What should I be on the lookout for when applying for an unsecured loan?
Whilst repayments may be advertised at a certain rate, rates will not be the same for every person and will very much depend on your credit rating. As each deal is specific, make sure to read the fine print before signing your loan agreement.
What are the consequences of not repaying an unsecured loan?
Whilst an unsecured loan differs from a secured loan in that the lender doesn’t hold a position of have any collateral, that is not to say there aren’t repercussions for non-payment. These penalties can really vary, however,
- A a number of lenders could enforce a penalty for late payment.
- Moreover, if If a loan is not paid they lender may sell the debt to a third party debt collector who will work to make sure it is paid. This can involve taking you to court and will almost certainly affect your credit rating.
- The lender can take you to court
Why should I choose a secured loan over an unsecured loan?
An unsecured loan may be a better option if you need to borrow less money. They also work well if you simply don’t have an asset with which to guarantee a secured loan.