Unsecured Loans Explained

To learn the basics of how to borrow using unsecured personal loans, please read on.

How do unsecured loans work?

Unsecured personal loans are a way that lenders offer easily accessible affordable borrowing, for example if you're planning ahead for a holiday or need to buy a new car.

These type of loans have many uses and this can be achieved without you having to use any property you own as a form of guarantee for your repayments.

Unsecured loans are a flexible way for you to borrow from £1k to £25k over a term of 1 to 5 years.

This means you can to tailor the amount you wish borrow, the loan terms or period (duration of loan repayments) and therefore the repayments to suit your current income levels.

By planning your finances in the right way, and finding the best unsecured loans, they may be used for a number of things from as diverse as home improvements to purchasing a new car; they can even be used for unsecured debt consolidation loans.

Eligibility

There's a wide range of unsecured loan lenders in the market, each having different lending criteria, offering various interest rates. Loans which are not secured on property are available equally to people who are not homeowners, as well as to those that own their own home.

Interest rates charged on your loan depend on the amount being borrowed (in general, larger amounts attract lower interest rates), on the loan's term and also on your own personal circumstances. If you've a good credit history then you are much more likely to be able to apply for the better rate unsecured loans which are offered by major providers, as it will five them more confidence in your ability to meet your repayments.

Otherwise, unsecured loans may seem to be a risky investment for loan providers, with there being no security in place so that they can reclaim their funds if the repayments are not met. Although unsecured loans for bad credit does exist, they typically have higher interest rates.

If you happen to have a bad credit history, you can simply only apply to those who accept applications from those with bad credit, before you consider comparing bad credit loans.

Two main types of unsecured loans exist:

1. Fixed personal loans

The commonest type of unsecured loan is a fixed loan, where the loan amount and total interest which is payable is evenly divided over the entire loan's term.

This is a more practical solution as it will enable the borrower to realistically plan out how much they can actually afford to pay back every month, and then to borrow accordingly.

Fixed interest rates will mean that your monthly repayments will stay the same regardless of national interest rates fluctuations (up or down).

Tools and tips

When you compare fixed rate unsecured loans online it's always advisable to find out the likely monthly repayments and the total credit charged, some lenders have an online repayment calculator; remember that in some cases, these online calculators only provide estimates which are based on the loan companies typical APR, and your actual repayments may in fact be slightly higher depending on the interest rate being offered and the actual size of your loan; small unsecured loans attract higher rates.

Another way of comparing cheap unsecured loans online is based on if they offer repayment holidays within the loan's term, or if they impose any early repayment charges.

You can contact lenders or loan brokers directly using an online application form. Just complete the form and find out more today.

2. Flexible loans

Flexible loans are much less common and are offered by fewer unsecured lenders; and typically come in one of two formats:

a) A maximum borrowing amount

These allow you to specify a maximum borrowing amount but will not require you to take all the funds at the same time. Instead you only need to withdraw the amount that you need when you need it, and pay interest on that amount.

Typically, these types of loan will be useful for long term, variable projects like building work.

b) Upfront fixed amount

More commonly, flexible unsecured loans will lend an upfront fixed amount then offer the option of repaying the loan early or make overpayment's as you see fit, sometimes without making any penalty at all.

Flexible loans often state that a minimum amount will need to be repaid every month however accept greater repayments without making any charges. But, flexible loans will usually charge much higher interest rates.

Extras

Payment Protection Insurance (PPI)

Some unsecured lenders provide optional Payment Protection Insurance (PPI) with alongside their loans. PPI is designed to meet loan repayments if you're unable to do so, because of accident, sickness or unemployment. Previously, these plans were mis-sold (by unscrupulous companies), so you will need to carefully consider all your options.

PPI may an extra cost but can in certain cases be very worthwhile, for example, to offer peace of mind when you borrow larger loans.

Getting the cheapest unsecured loans

If you are comparing monthly repayments, extra features and charges which are offered by different unsecured lenders it's best to find an unsecured loan which suits your own financial needs.

You can start by prioritising your essential needs.

1. Rates or extras

For example, having cheaper interest rates may be important, however deciding if repayment holidays or any other clauses are worth you paying extra for, will depend on your exact circumstances.

2. Direct or brokered

There are certain unsecured loans which borrowers in the UK can choose that are offered by using a broker, whilst others are offered online.

3. Arrangement

You'll need to make sure you are satisfied with how your loan will be arranged and managed, before you decide to take it out. Another thing to consider is if there are any arrangement or upfront fees?

In summary, by taking into account each of these factors, you will be able to borrow the amount required and repay it over the term (time period) of your choice, with repayments which suit your lifestyle even if you have a bad credit history.

For instance, those with a bad credit history, might be able to get a secured loan by having a guarantor who is a homeowner. That is, those who have a poor credit history, who have been refused unsecured borrowing may find secured loan comparison offers a better option for borrowing.

Want to apply for a loan today?