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Unsecured Loans

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From time to time, we all require some extra cash. Home repairs pop up unexpectedly or you suddenly find your car in the shop. Therefore, an unsecured loan can be a worthwhile option for many borrowers.

Here is some important information to know before submitting your loan application.

What Are Unsecured Loans?

Unsecured loans are a type of personal loans. They differ from secured loans in a few ways. Secured loans require the borrower to link debt to their property, for instance a house or car. In case you default on your secured loan - meaning you fail to pay back what you owe, the bank or lender can make claim on your property or asset.

Unsecured loans are available based on a borrower’s credit score and financial situation, and you don't need to provide any security. So, a personal loan is a lot safer option than a secured one, but of course, it comes with a higher interest rate and lower available loan amounts. You can usually borrow between £1,000 and £25,000. Secured loans are usually available for more depending on the borrower’s circumstances (e.g. the value of the property the loan is secured with).

Why Take Out an Unsecured Loan?

There are many reasons why someone might need an unsecured personal loan. This type of loan can be useful for financing major purchases or consolidating debt.

Some common reasons for applying for an unsecured loan include:

  • Consolidating high-interest debt
  • Unexpected repairs or emergencies
  • Paying off medical bills
  • Financing necessary home repairs

It can seem tempting to take out a personal loan for things like vacations or electronics with a high price tag. This is not recommended. Unnecessary debt can strain your finances and damage your financial health.

If you want to buy luxury items or experiences, it is typically best to save up beforehand. Unsecured loans are recommended for emergencies. Or other unavoidable financial needs, including debt consolidation loans.

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Advantages of Unsecured Loans

Unsecured loans offer several advantages for borrowers in comparison to other types of loans.

  • Secured loans are limited in availability because you must be a homeowner. However, unsecured loans do not have the same restrictions. And more people are able to procure an unsecured loan than a secured loan.
  • You do not have to provide security for the loan. The lender will not have a claim on your property or other financial assets if you do not make repayments.
  • Borrowers have increased flexibility for loan amounts and setting the terms for repayment. So, you can choose to make repayments that work with your schedule and finances.
  • Depending on your loan and terms, you may be able to have a payment holiday. These are typically a couple of months at the beginning of your loan agreement when you are not required to make repayments. Therefore, this is a great option if you have considerable unexpected financial obligations come up at once.
  • Better credit scores may qualify you for better interest rates and higher amounts for your loan. Also, interest rates are generally optimal for loans between £7,500 and £15,000 and with loan terms between three and five years.

Disadvantages of Unsecured Loans

As with most loans, there are some disadvantages to borrowing money through an unsecured loan.

  • Personal loans are not typically a great option for bad credit loans. Lenders use your credit score to judge your ability to repay your debt.
  • Your current debt can affect your approval or the amount of your personal loan. If you have a high debt-to-income ratio, lenders may be wary to lend you more money.
  • Your income is also a factor in getting approval for an unsecured loan. Lenders use your income to gauge whether or not you make enough money to repay your personal loan in an acceptable timeframe.
  • Maximum loan amount tends to be less for unsecured loans than secured loans.
  • You may incur late payment fees if you fall behind on repayments. And This could potentially affect your credit score.
  • If you borrow a very large or small amount, you may have higher interest rates.

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How to Apply for an Unsecured Loan

There are a variety of lenders that offer unsecured loans. However, it is important to do your research when shopping for an unsecured loan. Different lenders may offer different personal loan terms and interest rate.

You can typically apply for an unsecured loan through online resources or over the phone. Also, If you prefer in-person service, a traditional bank or credit union also offers unsecured loans.

Follow these steps to apply for an unsecured loan:

  • Read your personal loan agreement carefully. Ask any questions you may have about repayments or your loan rate and term.
  • Once you submit your personal loans application, the lender will let you know whether or not you are approved. From there, you can set up your monthly payments.
  • You will likely need to provide the following information to a lender when submitting an application: home address, bank account information, financial information, employer information.
  • Determine the total amount of your loan, including interest. This way, you'll know how much you are responsible for repaying. Break down your monthly payments to ensure they fit in your budget. Only take a loan amount you absolutely need and can easily pay back.
  • Find the best Annual Percentage Rate (APR) and loan term for your needs.
  • Check your credit rating so there are no surprises when submitting your personal loans application.

How do I qualify for an unsecured loan?

To qualify for a personal.loan, you usually need to check a few boxes. For instance, you need a regular income, best coming from employment. You need an address, and you need to show that your income is higher than your spending - in other words, that you are able to afford to take out a loan and pay back the money you owe in regular instalments. When applying online, you need to have a bank account where the personal loan can be paid into.

You don't need to be a homeowner to qualify for a personal loan, but it's worth mentioning since it can really help your chances. Same goes for a good credit score. Some lenders might ask about your credit history, but don't worry. If you don't have a credit history or if your credit score is not the best. You might still be approved for personal loans.

I want to apply for a personal loan. What should I watch out for?

When searching for a personal loan, make sure to check the lender or broker's site for signs of trustworthiness. On the site, usually on the footer look for a sentence "authorised and regulated by the financial conduct authority". Also, there has to be a representative apr, which should include the interest rate, the total amount repayable and monthly repayments. Make sure the small print for representative apr is in line with what they say on the rest of the site. It should also be displayed where the company's registered office is located. It's safe if the company is registered in England or Scotland. You can always double-check the registered office address at the Companies House website to make sure it's genuine.

Final Thoughts...

Unsecured personal loans can be helpful if you need cash to pay for unexpected repairs, finance major purchases, or consolidate high-interest debts.

These loans do not require the borrower to own property. But they are not available in the same maximum amounts as secured loans.

Your credit ranking and financial health are also important. This may impact the amount you are approved for and your unsecured loan term.

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