Unsecured loans

Types of unsecured personal loan

There are lots of different types of loan. They typically fall into two categories - secured and unsecured.

For example, a personal loan to fund home improvements or consolidate debts will usually be unsecured.

One of the most popular types of secured loan is a mortgage, which uses the home you’ve purchased as security.

While some car loans will be unsecured, others might use your vehicle as security.

A guarantor loan can also either be secured or unsecured. If it’s secured, the guarantor’s home could be at risk if you fall behind on payments.

There are then other types of loans which are secured, such as bridging loans.

What can you use an unsecured loan for?

An unsecured loan can be a good way to borrow if, say, you want to fund a big expense, such as home improvements, a new car, a wedding, or a big holiday.

You can also use one of these loans to consolidate debts, such as credit cards, store cards and loans into one place with one lender. This can make it easier to keep track of your debt and pay a lower interest rate.

How much can I borrow with an unsecured personal loan?

With a personal loan, you can usually borrow a sum of between £1,000 and £25,000, though some providers might offer loans of up to £50,000.

It will depend on what you need the money for.

Be aware that smaller loans can often come with a higher interest rate compared to larger loans.

With this in mind, you should only look to borrow the amount you need, and to pay this back over the shortest timeframe possible. This will ultimately save you money as you’ll pay less interest overall.

What should I consider before taking out an unsecured loan?

You need to ensure your monthly payments are affordable.

If you’re looking to pay less interest, you could look at reducing the length of the loan term. But you must be certain that you can still afford the monthly payments if you made this kind of adjustment.

You also need to be aware that while headline rates can appear enticing, the interest rate advertised will not necessarily be the one you get offered. Some applicants will get offered higher rates, and some will get rejected altogether.

A lender will calculate how much interest you’re going to get charged based on factors which include your credit rating and income.

What are the advantages of an unsecured loan?

You can decide how much you want to borrow - and over what timeframe - giving you lots of control.

As the rate is fixed, you’ll then know exactly what your monthly repayments will be for a set period to clear the debt, making it easier to budget.

You can also guarantee your debt will be paid back in full by the end of the arrangement, provided you make all your payments.

What are the disadvantages of an unsecured loan?

Rates on an unsecured loan will usually be higher than those on a secured loan.

And, as an unsecured loan is riskier for a lender, you’ll typically need a squeaky-clean credit rating to get accepted.

If your application is successful, you will then be required to make strict payments every month. If you miss a payment, you’ll likely be charged a fee.

You will also be charged if you want to pay an unsecured loan back early. This is known as an early repayment fee.

What is the difference between secured and unsecured loans?

With an unsecured loan, such as a personal loan, you can borrow money without securing it against your home (or, perhaps, your car). This means your home (or car) is not at risk as it would be with a secured loan.

Given secured loans are lower risk for lenders - as they can seize an asset if you fail to make repayments - you might be able to borrow a bigger sum over a longer term. You might also get a lower interest rate.

But you need to be very careful, as you could end up losing your home (or other asset) if you cannot keep up with repayments.

Secured loans can also have expensive arrangement fees and other charges.

How can I get an unsecured personal loan?

Shop around and see how the different annual percentage rates (APR) stack up against each other. The lower the rate, the less you should end up paying back overall.

Also check for things such as an arrangement fee to set up the loan, and early repayment fees. Once you’ve found the right deal for you, you can usually apply online.

Get approved, and you could have the money in your bank account within days - possibly within hours.

Can I get an unsecured loan with bad credit?

When deciding whether or not to lend to you, a provider will take a good look at your credit score. This shows a lender how reliable you are with borrowing.

If your credit rating is not tip-top, this will affect your ability to borrow. As the lender will perceive you as a higher risk than a borrower with a good credit score, you might not get accepted - or you might get offered a higher rate than advertised.

The rules for personal loans state that lenders only have to give the advertised rate to 51% of accepted applicants.

So, while it’s not impossible to get an unsecured loan with a bad credit history, it’s certainly harder.

What happens if I’m turned down for an unsecured loan?

If you’re turned down, you could try a different lender. But you need to tread carefully, as making too many applications for credit in a short space of time will work against you.

This approach will leave marks all over your credit file, and a potential lender might view this as a sign that you’re desperate for credit.

To find out which loans you are most likely to get accepted for prior to making a formal application, it’s worth using an eligibility checker tool. This will carry out a soft search and will not leave footprints on your credit file.

There are also some simple steps you can take to boost your credit rating - improving your chances of getting accepted for a personal loan. This includes:

• Getting a copy of your credit report and getting any errors corrected. You can apply for a copy of your report from one of the three main credit reference agencies: Experian, Equifax or TransUnion.
• Getting registered on the electoral roll at your current address.
• Being disciplined about paying all bills on time.
• If your credit file links you to an ex-partner that you are no longer with, consider getting a ‘notice of disassociation’ added to your credit file links. This will ensure their credit score does not harm your rating.

Also bear in mind that while credit rating is a big factor in a lender’s decision, it’s not the only factor. Your income will also be taken into consideration – especially if you’re trying to borrow a bigger sum.

The best approach is to work out realistically what you can afford to repay each month, and then borrow as little as possible over the shortest period.

What are the alternatives to an unsecured loan?

Secured loan

This type of loan is secured against your property (can also be known as a second mortgage). If you fail to keep up with repayments, your home could be at risk. In some cases, one of these loans could be secured against your car.

Bridging loan

A bridging loan is a short-term loan that bridges the gap between a purchase and the sale of what will fund buying it. Sometimes used when buying a property, a bridging loan will enable you to make the purchase before the sale of your current home has gone through. As this is a type of secured loan, you’ll need to use your home as collateral.

Bad credit loan

If you have a low credit score, you could consider this type of loan. But be aware that they can come with very high interest rates. Think very carefully before signing up to this type of loan.

Guarantor loan

With this type of loan, another person (typically a family member or close friend) agrees to step in to pay off the debt if the person who took it out defaults on their payments. The guarantor will need to have a good credit rating and a decent income.

Credit card

If you have a good credit score and only want to borrow a small amount, it might be worth looking at a credit card with a 0% interest rate instead of a loan.

This can offer more flexibility, and possibly other benefits, too. The key here is to do the maths to see how the costs stack up.

Equally, if you have a poor credit score, you might want to investigate cards for those with bad credit ratings. These tend to have lower credit limits and higher interest rates. The idea here, is that if you use the card responsibly and make all the monthly payments when they’re due, this can, over time, help to build up your credit rating.

0% overdraft

Another option if you’re only looking to borrow a small amount of money is an interest-free overdraft.

Your authorised limit is a figure confirmed and approved by your bank. The amount available will depend on your personal circumstances, including your earnings, outgoings and credit rating.

If you go beyond this agreed limit, you’ll go into what is known as your unauthorised overdraft and this could be very costly.