What is an Unsecured Loan?

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Understand unsecured loans

While applying for a loan, people are worried about the collateral as they do not want to put up their property as a security, which they could lose if they fail to repay the amount.

But there is another loan option available which assists them to fulfill the financial needs without worrying about their property. Let us discuss this in detail.

What is an unsecured loan?

An unsecured loan is a suitable option for those who need more significant finances. You can simply apply for this loan and borrow money from any lender or bank.

The interest rates are higher because it is not secured on your property. Regular repayment should be made on the loan until the full amount is paid.

What are the factors that affect the cost of an unsecured loan?

The amount you can borrow depends on the lender. There are some essential things that they look at to determine the offering amount such as:

  • Duration of loan repayment,
  • The amount you need,
  • Your income details, and
  • Your credit history

What happens if you default?

A default on a loan is when you are unable to make the loan repayments. Defaulting on a loan essentially means failing to meet the terms and conditions of the loan contract.

In an unsecured loan, if a person is unable to make the payments, additional charges are incurred, and this severely impacts the credit rating.

Moreover, if the issues do not get resolved, a lender can take legal action against the borrower to get the amount back. They can apply for a demand order on the borrower’s property to fulfill their loss. However, this should be mentioned in the contract. 

What are the merits of an unsecured loan?

  • These loans are widely available.
  • An unsecured loan does not involve a borrower’s asset to secure a loan.
  • Most unsecured loans offer flexibility in terms of repayments, so borrowers can choose the years to make the payments.
  • The interest rate is usually fixed, so a borrower knows what amount they need to pay every month.
  • Some unsecured loans offer a payment holiday in the initial part of the contract that can be a period of two or three months.
  • The best rate is provided to borrowers who make repayments over five years.

What are the demerits of an unsecured loan?

  • The high-interest rate of an unsecured loan proves expensive.
  • Exclusive deals are open for borrowers with high credit ratings.

What are the essential factors to consider when applying for an unsecured loan?

  • A borrower should have a fair credit history otherwise, it is hard to get approved for an unsecured loan.
  • Failing to make repayments can affect your credit rating.
  • Additional payment charges are levied in cases of late repayment.
  • Lenders may provide a smaller maximum amount that they provide for a secured loan.
  • Work out what the repayable amount is including interest.
  • Do the research and find the term of the loan that you are comfortable with.
  • Calculate the monthly repayments and ensure you can easily afford them.
  • Find out the additional costs such as set up costs or early/late repayment penalties.

How to apply for an unsecured loan

You can apply online or visit a lender for a loan application. Make sure you have all of the required documents with you before starting the loan application process. The requested documents you will need are:

  • Bank account details,
  • Past three years home addresses,
  • Monthly income and expenditures, and
  • If you are working, the name and address of your employer

Is there an alternative?

An unsecured loan has a high-interest rate; thus, it can be expensive. However, this is a hassle-free loan option. There are other finance options available that can fulfill your credit requirements.

For instance, you can use a credit card when short term borrowing is needed.

It will also help you with shopping. This will benefit you during the interest-free period, but after this period, you will need to pay interest.  Ensure that the loan product meets your requirements before you apply.

Prepare for any change in circumstances that can happen over the time of credit agreement, as this can affect the repayment of the loan.

Final Words

Unsecured loans are an appropriate option for those who have a not so good credit score. Moreover, it is not necessary to be a homeowner to apply for this loan. You can easily borrow money with an unsecured loan to fulfill your needs.

Need some extra cash to get started?

Whatever term suits your budget, RateWise can match you with a local broker that knows how to help—regardless of your credit score! Get pre-approved for up to £10,000 today!

What is the easiest place to get a personal loan?

Ratewise is the easiest place to get a personal loan because we help you search the market and find the best certified lender for you.

How many personal loans can you have UK?

How many personal loans can you have in the UK? That depends on your financial situation. You are certainly able to take out more than one loan if you have the financial ability to.

If you are borrowing through the same lender however, it may be simpler to consolidate your payments to make sure you don’t miss any.

What is the easiest loan to get?

The easiest loan to get is a secured loan. This is because a secured loan comes with the condition that you put some of your property up as collateral during the loan period.

What is the minimum credit score for a personal loan?

The minimum credit score for a personal loan is dependent on your lender. With Ratewise we find you a certified lender who can work with your situation and help you build your credit score if it isn’t quite high enough to get your desired loan. 

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Categories: Personal Finance