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Unsecured Loans – All You Need to Know

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An unsecured loan is one that is often based on the applicant's credit score, as opposed to being secured by property or other valuable assets. You may also find that some refer to such a loan as an unsecured loan, or a signature loan. The amounts offered with unsecured loans can be much lower than that of a secured loan, although this can vary depending on the overall credit score of the applicant. Interest on unsecured loans are generally higher, because of the risk the lender takes when making an unsecured loan, in that there is no collateral as backup should a customer fail to make repayments.

How Unsecured Loans Work

When a person makes an application for an unsecured loan, it will be likely that the lender will review your credit file to help with its final decision. As there is no collateral associated with the loan, it is often the case that those with a poor credit history may not qualify. As there are many financial organisations, the rules can vary from lender-to-lender. While it can be assumed that those with a poor credit history may struggle to qualify for an unsecured loan, some may find that a loan can be issued, albeit with a higher interest rate.

Apply Online

As the Internet has been adopted by many as their platform of choice when it comes to the running of personal affairs, it stands to reason that many will make an application for an unsecured loan online. While such a process can be worrying too some, it's worth noting that any financial body must ensure that its website is fully secure in order to protect its users,

The information given is normally done via an online form, which will ask for details to determine your identity. As to how the decision is finalised can vary from provider to provider. For example, some may be able to offer applicant an instant decision on the spot, whereas others may email with you a decision, or contact you on the telephone number provided to them. There can also be occasions where an instant decision cannot be made, and your application will be reviewed further, with the application receiving a notification when a decision has been made.

Those who to check that the lender they are considering are reputable can ensure the lender is authorised by visiting the FCA website at www.fca.org.uk.

Call the Lender

The second method to apply for an unsecured loan is via the telephone. Users will call a dedicated number, and will be forwarded to a representative of the lender who will complete an application with you over the telephone. Just like the online application, the representative will need to ascertain the identity of the applicant by asking a series of questions. A decision is often delivered in one of two ways. Firstly, the applicant will be notified of the decision over the phone immediately, and will be informed of what occurs next. Secondly, the lender you select may need to make some further enquiries, and will call you back with an update about your application.

What Happens Next?

After you have applied for an unsecured loan, many lenders will be able to provide applicants with an instant decision. However, there will be a credit agreement that will need to be signed before the funds are transferred. This ensures that the applicant fully understands the terms of the loan.

Depending on the lender you choose, there may be other factors to consider when it comes to what happens following your application and decision. Some lenders may require more information, so your loan could be agreed in principal, with a final decision being made once all the relative documentation has been forwarded in.

Regardless of whether you've made an application or online or over the phone, you will find that most lenders are able to transfer funds to an applicant's account within 24 hours. However, some lenders may have different working practices, so if a quick transfer is what you're looking for, it can be worthwhile making the enquiry before applying.

What Is an Unsecured Loan Used For?

There can be many reason as to why people opt for an unsecured loan. One of the most popular reasons is debt consolidation. While taking out a credit card or store card in the interim may not be too intimidating, as time goes on, some may find that the repayments couple with excessive interest can become overwhelming. An unsecured loan can help as it will ensure that you're able to bring all your payments up to date, and make one monthly payment at a lower interest rate instead of several payments that have differing interest rates.

Unsecured loans can also be taken out for other reasons, which include but are not limited to the following reasons:

  • Home improvements
  • Vehicle Purchase
  • Holiday Funds
  • Paying for a Wedding
  • Celebration of a Milestone

Although there are any instances where you can choose to apply for an unsecured loan, you shouldn't opt for one if you're looking to start a business. Any business start-up loans have to be applied for via the right channels, and will normally undergo a different screening process when it comes to your application.

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Who Can Apply for an Unsecured Loan?

Due to the fact that many of those who apply for an unsecured loan are often assessed on their credit score, there are many who can apply for an unsecured loan, as there is no collateral needed. Those who have a healthy credit score will find that they are able to obtain a loan with a reasonably low APR. However, those with a more blemished credit report may find that the interest they pay is a little more, due to the risk involved.

As there is the loan isn't granted based on what assets you have, a wider demographic is able to apply for a personal loan when other solutions may not suit their needs. For example, a secured loan will often use the applicant's property as security, so those who rent would not be able to take advantage of such a loan, unless they owned property elsewhere.

Applicants with Bad Credit

There are loans that can be marketed as unsecured loans for bad credit, and as expected, are tailored towards those who may be struggling to get an unsecured loan from other providers. While there are many reputable companies that deal with such loans, it's important that lenders read the small print, as unsecured loans for bad credit can come with a very high APR, which could potentially cause financial difficulty if you don't fully understand the terms associated with the loan.

Unemployed Applicants

As well as bad credit unsecured loans, there are also options available for those who are not currently in employment. The amounts offered can be much lower to that of traditional unsecured loans, simply due to the reduced income the applicant receives. Again, there are many reputable lenders who can assist with unsecured loans for unemployed individuals, but you should be aware that there are many unsavoury companies who may look to take advantage of your current predicament. As such, you should look to ensure that the terms and conditions associated with the unsecured loan allow you to make repayments comfortably. It's important that when budgeting payments, you are also considering the interest rate, as this will make a difference to the overall amount.

The Pros and Cons of an Unsecured Loan

Like any financial commitment, there can be a pros and cons associated with an unsecured loan, depending on the lender you use, and the reason you're taking out the loan.

The Pros

  1. a)An unsecured loan can be easily applied for, and can normally be completed within a matter of minutes.
  2. b)A fast deposit of funds in most instances.
  3. c)Unsecured loans don't require the applicant to have collateral to apply for the loan.
  4. d)Unsecured loans can be much cheaper that using an overdraft or credit card.
  5. e)Potentially pay off your current debt in a smaller timeframe.

The Cons

  1. a)Some unsecured loans can have a higher interest rate than other forms of borrowing.
  2. b)A reduced interest rate on larger amounts can make it tempting to borrow more than is needed.
  3. c)The minimum amount is normally around £1,000, which means that those looking for smaller amounts will be borrowing more they need.

Things to Look Out for in Relation to an Unsecured Loan

Even though the pros and cons of unsecured loans have been highlighted, there are still other considerations to make when making an application for an unsecured loan.

Some lenders may not advertise their interest rate, and just offer a representative APR. Although most applicants will be eligible for the standard APR, there can be many who end up paying more interest. If you're in any doubt in relation to the interest rate, it can be advisable to ask the representative for a quote based on your circumstances.

It's also worth noting that some lenders may supply loans that come with a variable APR, which means that the APR can go up as well as down. There can also be arrangement fees to consider. Under the Consumer Credit Act 1974, any arrangement fees need to be detailed within the correspondence supplied to the applicant.

When taking out an unsecured loan, it is normal to be offered some form of insurance. While payment protection insurance has made the headlines due to several financial institutions mis-selling the same in the past. However, insurance can be a good idea in some circumstances, you just need to ensure it's something you want to take out. It should never be added to a loan unless you have requested it.

Unsecured Loan Cooling-Off Period Explained

While there will be a lot of decision-making when making an application for an unsecured loan, there can be instances when you find you no longer need a loan after taking it out. This can be due to a change in circumstances, or an unexpected influx of capital.

Lenders who supply such loans will offer applicants a 14-day cooling off period. This will start from the moment you sign the agreement, or whenever you receive a copy of the agreement.

If you do decide to cancel the loan within the 14-day grace period, you will have 30 days to pay back the amount in full. While interest can be charged for the period you had the money, any fees associated with the loan will need to be refunded.

Finding the Best Unsecured Loan Deals

Different lenders will appeal to different people, so it's important that applicants are able to ascertain a loan that meets their budget and requirements. With this in mind, it's important that you don't opt for the first loan you see, and carry out some research before making an application.

Different lenders will often charge different rates of interests, with higher interest being applied to loans provided to those with bad credit. If you are unsure as to where you currently stand in relation to your credit score, it can be a good idea to check your current score to see what kind of loans you are able to apply for. The main three credit reference agencies are as follows:

Experian

Equifax

CallCredit

There are other platforms that applicants can use to find out their credit score, depending on their budget and preference, but the reports themselves will normally derive from one of the three aforementioned companies. Once you have access to your credit score, you will be in a better position to shop around for a better deal in relation to interest rates.

It can also be advisable to compare a series of loans using a comparison website. This will allow you to quickly scour the available loans, and opt for the one that best suits your needs and budget.

Have a look at our article on The 10 best types of unsecured loans and what to look out for.

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