Table of Contents
- What Are Secured and Unsecured Loans?
- How do Unsecured Personal Loans Work?
- What Is the Best Place to Get an Unsecured Loan?
- What Happens Next?
- Who Can Apply for Unsecured Loans?
- Types of Unsecured Loans
- The Pros and Cons of Unsecured Loans
- Benefits of an Unsecured Loan
- Disadvantages of an Unsecured Loan
- Should I Take Out an Unsecured Loan?
What Are Secured and Unsecured Loans?
An unsecured loan is one that is often based on the applicant's credit, as opposed to being secured by property or other valuable assets. You may also find that some refer to such a loan as a signature loan.
The amounts offered with this type of loan can be much lower than those available with a secured loan, although this can vary depending on the overall credit score of the applicant. Interest on these loans is generally higher, because of the risk the lender takes when making a loan without security, in that there is no collateral as backup, should a customer fail to make repayments.
A secured loan, on the other hand, is one that is secured by collateral such as property, for example. Secured loans offer more money, and the borrower benefits from a longer repayment period. The amount of interest paid is also lower. However, there is always the risk of losing the asset if the borrower fails to repay the money.
How do Unsecured Personal Loans Work?
When you make an application for a loan, the lender will likely review your credit file to help with the 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.
However, the rules can vary from lender-to-lender. While it can be assumed that those with a poor credit may struggle to qualify for this type of loan, some may find that a loan can be issued, albeit with a higher interest rate.
What Is the Best Place to Get an Unsecured Loan?
The quickest and easiest way to apply is 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. 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
As to how the decision is finalised, that can vary from provider to provider.
Some may be able to offer the 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 want to check that the lender they are considering is reputable can ensure the company is authorised by visiting the Financial Conduct Authority website at www.fca.org.uk
Call the Lender
The second method to apply for a loan is via 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 on your application.
What Happens Next?
After you have applied for a 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 principle, 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.
Who Can Apply for Unsecured Loans?
Due to the fact that many of those who apply for financing are often assessed on their credit score, most people can apply for a 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 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 no credit check unsecured personal loans, and as expected, are tailored towards those who may be struggling to get a loan with no collateral from other providers.
While there are many reputable companies that deal with such loans, it's important that lenders read the small print. Some loans 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.
Just like loans for poor credit ratings, there are also options available for those who are not currently in employment. The amounts offered can be much lower compared to traditional loans, simply due to the reduced income the applicant receives.
Again, there are many reputable lenders who can assist with 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 loan allow you to make repayments comfortably.
Top Tip: Always use soft search reports to see your eligibility chances before applying directly with the loan supplier.
Types of Unsecured Loans
If you're already sold on the idea, you should know that there are several types of loans available. However, note that each one comes with certain pros and cons. 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 loans offered without asset security; 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 upon instalments until the loan is fully repaid.
Although this type is more suited to those with good credit rates, even individuals with a less-than-perfect credit score report can take out a signature loan, but at a high 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 high APR. 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 are designed for education funding. That relates to the fact that these 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 are loans you get from your "peers". 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. Although your history will always play a significant role, even bad credit will still be considered.
The Pros and Cons of Unsecured Loans
Like any financial commitment, there can be pros and cons associated with this type of financing option, depending on the lender you use, and the reason you're taking out the loan.
Benefits of an Unsecured Loan
- They allow flexibility in terms of loan amounts and repayment options.
- They can be viewed as a better option for consumers who only need to borrow a small amount.
- They are a more widely-available choice for individuals with a low credit score.
- Typically, you can qualify for a 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 choice 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 these loans are usually in small amounts, completing an application can be much quicker than in the case of secured loans; in some circumstances, the amount is received on the same day it is approved.
Disadvantages of an Unsecured Personal Loan
- Because these loans don't have a collateral (i.e. car, house), you will be faced with high APR rates; borrowers with a low credit score will face high interest rates on unsecured bad credit loans.
- Qualifying for a loan can prove to be more challenging.
- The minimum amount is normally around £1,000, which means that those looking for smaller amounts will be borrowing more than they need.
- 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 a loan like this, as the lenders will only be able to offer you limited loan amounts.
- There is a lack of flexibility due to the previously-agreed-upon instalments.
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 a loan without collateral in the event that your credit history 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 The 10 best types of unsecured loans.