Unsecured Loans

How to choose an unsecured loan...

An unsecured personal loan is the ideal way to borrow money for those purchases that are just out of reach.

Providing you pass credit checks and have a good steady income, you could be borrow up to £25000 without having to put forward any personal collateral!

These loans are good for:

Good credit history
As these loans are unsecured, the lender that you borrow from is at a far higher risk then they are with a secured loan. If you don't pay, they will be faced with a long and costly process of trying to regain what they have lent you, as there is no collateral that the loan is signed against.

With this in mind companies offering unsecured loans take the precaution of checking out your past finances to judge how much of a risk you are likely to be.

Credit check agencies are employed to search through your past records and assess how much of a potential threat you pose.

Any purpose borrowing
These loans can, generally speaking, be used for any legal purpose, that you require money to finance. i.e a new car, holiday, wedding etc.

These loans are unsuitable for:

Poor credit history
As these loans are dictated by personal credit history and that is the lenders only means of security, they can be difficult to obtain if you have a bad financial history, or sometimes merely for the fact that you don't have a previous credit history, or are self employed.

If this is you, don't despair! There are companies who will consider different financial circumstances and indeed offer unsecured loans, albeit at a higher APR.

Otherwise, if you are a homeowner and in this predicament, with the current strength of the housing market it may be worth looking into getting a secured loan.

Any purpose?
Despite being promoted as 'any purpose' there are inevitably some exceptions to the rule, although they vary between lenders.

If you are looking to get an unsecured loan for a business venture, speculative purchase, or in some cases, debt consolidation purposes, check that your lender permits borrowing for these means.

Look for:

The best deal
Before you go ahead and sign yourself into a contract, make sure you are getting the best deal possible.

ChooseMoney recommends comparing at least 3 companies before you make a decision, and with the power of the internet, and the resources here at ChooseMoney that should be an easy feat to accomplish.

N.B Interest rates are not as straightforward as they seem! Look for either of the following two terms when comparing loans:

Typical interest rates:
This is an example of the rate offered to the majority of applicants. The rate you will be offered could be better or worse, depending on your financial situation, the amount you are borrowing and the time, in which, you plan to repay the loan

Or . . .

Set interest rate:
This means that the rate presented is the rate given to every applicant that gets accepted, regardless of finances, loan amount, or duration of repayments.

In addition to these two terms check whether the rate offered is either a:

Fixed interest rate:
This means that the APR you are offered will remain the same throughout the duration of the loan

Variable interest rate:
Meaning that the rate in question will rise or fall in line with the Bank of England's base rate

Payment protection insurance
If you want to make sure that your loan is covered in the event of sickness, accident or unemployment, you may wish to look into the cost of 'payment protection insurance'.

These policies vary between lenders and can be quite costly, but may help you sleep more easily, particularly if you have a large loan and a long repayment plan.

Watch out for:

Redemption penalties
Some lenders will charge you a fee of around 1 month’s interest if you repay the loan before the agreed term expires. These charges can, however, be avoided if you choose a lender who doesn't charge redemption penalties.

Don't forget:

Deferred repayments and payment breaks
Many lenders now offer these as incentives and can be a very welcome relief from the monotony of monthly repayments.

Deferred repayments offer a payment free period of approximately 3 months before you begin the loan repayments. This can be very useful time to organise your finances and perhaps save some money for any lean months in the near future.

Payment breaks/holidays provide a break at an agreed point during the course of the repayments. This can be helpful if you know of a period coming up that finances may be tight.

N.B During these breaks interest will still amass on the outstanding balance, increasing your overall repayments, so don’t just take them for the sake of it.

Compare unsecured loans