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When it comes to credit, unsecured loans allow borrowers to use the funds involved for just about any purpose. Before you do decide to pursue a loan application, it matters that you have a good understanding of what these loans are, how they work, and whether they are the right choice for them.
Getting to know the basics
When you take out an unsecured loan from a lender, you will not be required to present a property or any asset to secure it. Unlike secured loans that need collateral, there is no asset or anything at all of value that is pledged as loan collateral. As a result, unsecured loans are considered less risky to the borrower but riskier to the lenders.
Your credit rating is the biggest determinant on whether you will be approved for an unsecured loan or not. Not only do you get a higher approval chance if your credit is good, you can enjoy better interest rates, more loan options and not to mention, higher loanable amount too. If your credit is bad, you’ll likely need to present a guarantor to get approved.
Types of unsecured personal loans
Depending on your credit score, there are several types of unsecured personal loans that you may be able to access. A signature loan is a popular form of unsecured personal loan which many credit unions offer. All this loan needs is your signature along with the promise that you will pay the money back. Other loan options include peer to peer loans, using credit cards, personal lines o credit, and student loans.
If you have bad credit, getting an unsecured loan request approved can be a huge challenge. Your choices will be significantly limited and you’ll have to be prepared to pay a much higher interest rate too. It might be best to refrain from borrowing any money until such time as you get your credit score fixed for you to access better loan terms and rates.
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.