If you need to borrow money, you can consider two types of financing options: secured and unsecured. Both types of loans enable you to borrow a large sum of money, but unsecured loans are less risky as they are not secured against your personal assets such as your house.
What are unsecured loans in the UK?
Unsecured loans in the UK are personal loans that are not subject to collateral. Instead, your application is processed based on the following factors:
- Credit history
- Income and affordability
- Existing debt obligations
Your credit history is an acknowledgement of your repayment history. If your credit score is up to scratch, you will most likely qualify for lower interest rates. Subprime borrowers are also eligible to submit their application. The approval relies on affordability.
Lenders will check your income sources to decide on your application. You should be able to demonstrate your repayment ability without struggling with other essential expenses.
Your debt-to-income ratio is an important factor that lenders take into account to determine your affordability. Taking out another loan with existing obligations will strain your pocket.
How do unsecured loans work?
An application for an unsecured personal loan undergoes four stages:
- Fill up the application
If you meet the basic eligibility criteria, submit the application form. A lender will contact you to know your income details and financial commitments. Then, the lender will assess your application and credit score to decide whether to approve it.
- Approval
If the loan is approved, the lender will let you know interest rates, APRs, repayment terms, and repayment schedules. Interest rates for personal loans are generally fixed. If your credit score is not impressive, they will be high.
- Cooling-off period
You will have 14 days to cancel the agreement once you have signed it. You simply have to give notice to your lender in writing. No early repayment charges are levied. If you cancel the agreement immediately, most lenders waive interest as well.
- Repayment
Unsecured loans are paid down in fixed monthly instalments over an extended period of time. The repayment term is usually up to 5 years. Overpayments will attract early repayment fees, although not all lenders charge these fees, and late payment fees will be charged in case of late or missed payments.
How much do unsecured loans cost?
The cost of an unsecured loan depends on several factors, including:
- The amount you want to borrow
- Your credit history
- The repayment term
- Interest rates and APRs you are offered
- Your income and affordability
- The lender’s assessment of your application
The actual cost of the loan is determined by the APR, not the interest rate, as they include fees and charges as well. APRs are a reliable measure for choosing the most affordable loan option.
You can use comparison websites and loan calculators to understand the cost of an unsecured loan. Bear in mind that no lender can reflect actual interest rates and APRs without perusal of your credit score and financial condition. Make sure that your budget has room to make additional payments in case of high interest rates.
Example:
The principal – £10,000
APR – 7.05%
The repayment period – 2 years
Monthly repayments – £446.96
The repayable amount – £10,727.04
If you choose a longer repayment period such as 5 years, monthly instalments will reduce to £197.22, and the total repayable amount will increase to £11,883.20.
Therefore, it is essential that you carefully choose a repayment period.
What can you use an unsecured loan for?
You can use personal loans for several reasons, such as:
- Unexpected expenses: These loans can provide you with immediate access to cash, which makes them ideal for funding small emergencies.
- Debt consolidation: You may use a personal loan to combine existing outstanding debts, which enables you to make one monthly repayment instead of several.
- Home improvements: An unsecured loan could help fund refurbishment projects without securing the borrowed sum against your property.
- Major purchases: Some borrowers use personal loans for larger expenses when they are unable to pay for them outright.
Can you get an unsecured loan with bad credit?
Yes, there are lenders who provide bad credit unsecured loans. However, they charge high interest rates. If you are applying for an unsecured loan with bad credit, it is likely that you are offered a smaller loan. Because of a high default risk, lenders hesitate to approve applications with a large amount. Before applying to a lender, make sure that you meet the minimum credit score requirement to avoid rejection.
The bottom line
An unsecured loan can be a flexible way to spread the cost of a significant expense without putting your home at risk.
The right loan amount depends on your individual circumstances. The application process is straightforward, but the actual cost can be determined only after submitting a formal application.
Are you looking to apply for a personal loan? If so, get in touch today to discuss your borrowing needs and explore your unsecured loan options.
FAQs
What things should you check before applying for unsecured personal loans?
Consider the following factors:
- APRs
- Total repayable amount
- The repayment term
- Affordability
What are the eligibility criteria for unsecured personal loans?
You must meet the following basic conditions to be eligible to submit your loan application:
- You must be an adult.
- You must be a resident of the UK.
- You must have an active bank account.
In addition, you must be able to demonstrate your repayment capacity and meet the lender’s credit score requirements.
When does it make sense to take out unsecured loans?
Unsecured loans can be a smart choice when:
- You want to consolidate short-term high-cost debts.
- You need money to cover one-off costs.
- You have a strong credit history and stable income source.
What borrowing tips should you keep in mind while using unsecured loans?
To ensure you do not fall into debt down the line, you should:
- Compare interest rates and APRs offered by different lenders.
- Borrow money as per your affordability.
- Do not borrow money more than you need.
- Read the fine print.
- Check your eligibility to prevent credit score damage.
Emma Anderson is a seasoned financial writer and consultant. She has more than eight years of experience in the UK financial and loan sector.
She is so passionate about financial literacy and responsible borrowing. Therefore, Emma has gained specialisation in explaining everything about complex loan products and financial management planning for every borrower.
Before joining the team at Quickloanslender, Emma worked as a financial advisor. She helped number of the UK locals in solving the problems related to their debt consolidation and short-term credit. She has an aim of providing clear, transparent, and actionable advice for everyone. It lets her readers making informed loan decisions according to their affordability.
Each blog, written after deep research, to have personal budgeting tips and financial education.
