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What is an Unsecured Loan

While there are different types of loans available to borrowers these days, they can be generally differentiated between secured and unsecured loans. An unsecured loan is one where no asset- such as a home or car- is used to guarantee the loan. A secured loan, on the other hand, is taken out against an asset which the bank can take if the borrower defaults his repayments.

Unsecured loans are based solely on the financial institutions assessment of the ability of the borrower to pay the loan back. His credit report, income source, and other application details are solely the basis for the decision of the lender whether to approve the application or not. The borrowed amount can range from £1,000 to £25,000.

Are unsecured loans good?

What is good with unsecured loans is that they can be widely available to a lot of people. They are also known for the flexibility they offer with repayment terms. Borrowers are generally known to choose between a repayment period of one to five years.  

There are even loans that might offer a payment holiday. This is where a borrower can have a leeway of two or three months before he pays the loan back.  

Taking out an unsecured loan can be a great way to build credit too. This is especially true if the loan is an instalment one as it can help build a history where you can establish a record of timely repayments. If you work hard at ensuring that your loan payments are made on time, this can have a positive effect on your overall credit score.

Disadvantages of unsecured loan

There are also drawbacks to unsecured loan. The fact that it's not guaranteed by an asset means it may only be available for people who have high credit scores. Borrowing smaller or larger amounts can be expensive, interest-rates wise too. Generally, the interest rates for unsecured loans are cheapest when you borrow around £7,500 to £15,000.

Important things to consider

Before taking out any loan, extensive planning is needed to ensure that the repayments will be easy enough for you to afford. Decide whether you need a large or a small amount of money and consider the current state of your credit score to assess your chances of getting approved. Avoid borrowing more than you can afford. Factor in possible changes to your life too such as sickness or unexpected job loss during the repayment period. This way, no matter what happens you know that you have all your bases covered. 

When taking out an unsecured credit, you are mainly borrowing money without offering the lender any form of security. Generally, the application is banked on your personal credit rating, the amount you are borrowing, along with your financial status. Unlike secured loans where you are required to offer an asset to secure the loan, you aren’t required to do so in this form of credit. You are, however, bound legally to pay the loan back based on the loan terms you agreed on.

Reasons for taking out an unsecured loan

There are a number of reasons why people take out an unsecured loan. For instance, they may use it to consolidate their debts, fund some DIY projects at home, purchase a car, finance an event such as a wedding, or cover any emergency expense. Unsecured loans do not have any strict regulations as far as where and how to use them as long as it is within legal limits.

Your credit score matters

Since you are not presenting any asset to secure the loan, your credit score will play a huge part on whether you’ll be allowed to borrow money or not. Lenders will also look into your credit score to decide how much they will lend you and how much the interest rates will be. Generally, you can expect better rates when your credit score is good. But expect the rates to be hefty if your score is less than ideal. Your risk level as a borrower will be assessed by the lender. The lower your credit score is the more of a risk you’ll be considered. 

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