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Unsecured Loans for Bad Credit- All You Need to Know

If you've found yourself in the predicament of looking for finance, however, have a less-than-perfect credit score, an unsecured loan could give you the help you need. Although these loans will often be short-term and for smaller amounts than a high street bank could offer (at notably larger interest rates), they will still give you the opportunity to get the emergency amount you need. Whether it's due to an unfortunate accumulation of debt, unexpected family circumstances, or missed utility payments, unsecured loans for bad credit are not as uncommon as you may think. This is especially true for those who have worked hard to get their finances back on track, as there are multiple avenues to explore.

Table of Contents

  • The Basics of Unsecured Loans for Bad Credit

  • Things to consider before applying

  • How do unsecured loans work?

  • Types of Unsecured Loans

  • Benefits of an Unsecured Loan

  • Disadvantages of an Unsecured Loan

  • How to apply for an unsecured loan

  • Should I take out an unsecured loan?

The Basics of Unsecured Loans for Bad Credit

You may already be familiar with these types of loans, but don't fully grasp the ins-and-outs. The term "bad credit" is irrefutably ambiguous and it's meant to define a credit score which is less-than-perfect. However, in the business world, your credit report is not defined by bynames (i.e. perfect, good, or bad), but rather with an associating number. Even this number is simply a credit standing idea and not the full picture, and that's why most lenders will take the time to at least discuss your options with you.

When it comes to the basics of unsecured loans , it's important to note that these types of loans are commonly offered to individuals who have had past credit problems, however, have been diligently working on improving their credit score. The reason for which these loans have a higher interest rate relates to the fact that anyone with a less-than-perfect-credit score represents a higher risk investment to the lender in question. In other words, it should be expected that the higher the risk, the higher the interest rate.

Things to consider before applying

Choosing any loan, unsecured loans included, is a substantial commitment which should not be taken lightly. Before deciding if this arrangement is the ideal solution for you, consider the following points:

  • Look up your credit rating in order to determine how your credit score might adversely affect your application.
  • Do extensive research and find an APR (annual percentage rate) that you're happy with.
  • Calculate the monthly repayments options and ensure you can afford them.
  • Calculate the total amount repayable when you take the interest into account.
  • Discuss any extra costs you need to budget for (i.e. late/early repayment penalties).

By answering these questions, you will be in a better position to choose the right loan and lender for your personal needs and circumstances – a vital point for anyone taking out a loan. That's because by considering your individual commitments, you will make sure that you can pay back the loan and any extra charges on time, which is ultimately the goal in these circumstances.

How do unsecured loans work?

By now you understand that your credit score is the mirror image of your financial tenacity. Needless to say that multiple opportunities are available for those who have good credit standing and that the three-digit number will determine which lender you can borrow from, and the total amount which will be given to you. It's important to understand that credit score is accumulated over time, not simply being a reflection of the past couple of months but rather giving institutions a clear picture of your financial health. Because this image is available to any financial organisation that is allowed to lend you money, every minor detail – ranging from monthly utility payments to safe financial investments – will go into building your credibility and reliability.

For example, if you have a long-standing history of missed payments, this may suggest that you won't be able to repay your loan, and that will limit your options. The situation is similar to being linked to an individual who has a bad history –these are all determinants which will play a role in receiving a loan. If you're wondering why that would be the case, companies will view you as a high-risk investment, one that isn't guaranteed to provide them with the return on investment they are expecting. Although you may find this confusing, considering that those who have bad credit history are bound to need extra financing, companies are simply protecting themselves against possibly bad investments. You can check your credit score at sites such as Experian

That is also the reason for which most individuals with poor credit score are only given short-term loans. Although there are lenders with liberal credit standards that will lend you a hand when you need immediate funds, there is usually a higher APR (annual percentage rate) or interest rate. That makes it imperative for you to consult with different lenders, and to know what your unique individual circumstances allow. You can still save a huge amount of money by comparison lenders, and your less than fortunate circumstances shouldn't dictate a compromise on favourable loan terms for you.

This means that there is light at the end of the tunnel: although it may be slightly more difficult, know that there are lenders who will be willing to look past your credit score and will discuss several options with you. As previously mentioned, unsecured loans are one of those options, provided that your credit score is less-than-perfect but you've been actively working to improve that. However, your choice of lender and the amount you can ask for will be limited. Additionally, don't be surprised by the higher costs this type of loan may incur, or that you may need some form of a guarantor.

This all relates to the fact that when a loan is unsecured, as the name suggests, there is no way to guarantee or otherwise secure the loan (i.e. a house can be considered as collateral). In the case of a secured loan, if you fail to repay the loan, your lender is legally allowed to take hold of your property in order to collect the loan which you have failed to repay. This makes this particular investment less risky for you, who are borrowing that amount, and higher risk for the lender. Because there is nothing which the lender can leverage on, you will not be able to find as many institutions that are willing to offer you an unsecured loan, for obvious reasons. However, don't be disillusioned that there are no avenues which they can pursue in the event that you don't repay them (i.e. taking legal action against you).

Types of Unsecured Loans

If you're already sold on the idea, you should know that there are several types of unsecured personal loans available. However, note that each one comes with certain gives-and-takes. Finding the one which works for you will depend on your own personal circumstances and needs:

Signature loans are considered the most common type of unsecured loans; they simply require your signature – along with your promise to repay the loan. Available at certain credit unions and banks, signature loans allow you to borrow a certain amount on the premise that you will be paying previously-agreed instalments until the loan is fully repaid. Although this type is more suited for those with good credit rates, even individuals with a less-than-perfect credit score can take out a signature loan, however at a higher interest rate.

Credit cards are another common way in which you can borrow money. You may already be familiar with this type of loan and its requirements. More specifically, you are able to borrow a certain amount over time, while also having the option of increasing your credit limit, should you deem it necessary.

The reason why credit cards are increasingly popular relates to how easy it is to use them: once you're approved, you almost instantly have access to a pool of money. The downside, however, is the interest rate. Although you can borrow at a "teaser rate" of 0% for a limited time, the interest rate will substantially increase over time.

That is one of the reasons for which many people try to avoid credit cards –you can end up paying hundreds of pounds in interest costs. However, they are ultimately easy and convenient, as you can even find hundreds of offers by checking your mailbox.

Student loans can be considered unsecured loans designed for education funding. That relates to the fact that unsecured loans provide the flexibility and versatility that students are looking for: grace periods, varied repayments options, and others. The only catch is that you obviously need to be a student.

In order to get a student loan, you simply need to visit the Financial Aid office at your school. They will guide you through the process (bear in mind that there's a lot of paperwork involved) and will answer any questions you may have.

Peer to peer loans As the name suggests, instead of the traditional borrowing techniques (i.e. banks or other lenders), you can borrow from individuals. Similar to signature loans, peer to peer loans have a generally fixed rate for instalment loans, along with certain competitive interest rates. Although your credit score will always play a significant role, even bad credit will still be considered.

Benefits of an Unsecured Loan

  • Unsecured loans allow flexibility in terms of loan amounts and repayment options.
  • Unsecured loans can be viewed as a better option for consumers who only need to borrow a small amount.
  • Unsecured loans are a more widely-available choice for individuals with poor credit score.
  • Typically, you can qualify for an unsecured loan without having substantial assets because the lender will not require security in the form of assets (i.e. home).
  • Since there is no collateral required, it's a less risky proposition for you, since there is no danger of losing any personal property such as a home or car.
  • Because there is no collateral to evaluate, and because unsecured loans are usually in small amounts, completing an unsecured loan can be much quicker than in the case of secure loans; in some circumstances the needed amount is received on the same day of being approved

Disadvantages of an Unsecured Loan

  • Because unsecured loans don't have a collateral (i.e. car, house), you will be faced with high interest rates; borrowers with bad credit will face high interest rates on an unsecured bad credit loan
  • Qualifying for an unsecured loan can prove more challenging

  • The repayment period is usually shorter than with a secured loan; this can also mean higher monthly payment amounts.

  • Borrowing substantial amounts won't be possible with an unsecured loan, as the lenders will only be able to offer you limited loan amounts
  • Lack of flexibility due to the previously-agree instalments
How to apply for an unsecured loan

As a general rule of thumb, applications for unsecured loans are made face to face, however, in some circumstances you can apply for a loan online or over the phone. It's important that before starting the application process, you have access to certain information which will ease and speed up the process. Typically, you will need:

  • Your home addresses dating back to the past three years
  • Your employer's name and address
  • Your bank account details
  • Financial information, including monthly expenses and income

Should I take out an unsecured loan?

Ultimately, the decision of whether this type of finance is right for you will depend on your circumstances and individual needs. There are multiple advantages to having an unsecured loan in the event that your credit score is more touch-and-go. However, there are also certain disadvantages which should weigh in on your decision. Take a look at our guide on how to get an unsecured loan with bad credit.

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