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Compare Unsecured Loan

Compare unsecured loans: what is the best loan for you?
What is an unsecured loan?

An unsecured loan allows you to borrow money without having to provide collateral. Collateral is typically a car or your property but with an unsecured loan, the lender bases their decision on whether they think you are able to pay back the money borrowed. Without the guarantee of collateral, lenders will run credit and identity checks to ensure you are who you say you are and to assess the risk of lending you money.

You and the lender enter a contract where they agree to loan you a sum of money, on the agreement that you pay back the money in a pre-determined timeframe. While unsecured loans do not require you to offer collateral, the lender retains legal rights to recover the money should you default on payments. This could lead to the lender taking out a County Court Judgement (CCJ) against you. A CCJ on your credit rating can have a highly negative effect.

A secured loan requires you to offer your assets as collateral, such as a car or a property. This will allow you to borrow more money but should you default on payments, the lender can recover the debt by seizing the collateral.

Unsecured loans comparison: why choose an unsecured loan?

If you don’t own your own home or need to borrow more than perhaps you can get with just a credit card, an unsecured loan could be an option. Unsecured loans tend to be on the lower end of the scale, anywhere between £1000-£25,000 while a secured loan can exceed £100,000.

Lenders will also set out a fixed payment plan. With most products, you will be able to choose the timeframe to pay the loan back, which could extend up to ten years.

Who can take out an unsecured loan?

Without the security of collateral, lenders, understandably, can be risk-averse, meaning they may be more cautious as to whom they lend. You may have more chance of being granted an unsecured loan if you fit the following parameters:

Good credit history: a good credit history will demonstrate that you can manage your money and are less likely to default on payments.
Electoral register: without security, lenders will need to run identity and credit checks. If you are not entered on the electoral register, some lenders may refuse to make a loan. An additional proof of address e.g. a tenancy agreement or utility bill may be sufficient for some lenders.
Employment: proof of employment, particularly secure employment will demonstrate to lenders that you are able to pay back the loan.

Compare unsecured loans: pros and cons

It is always best to compare unsecured loans against other financial products. Unsecured loans have several benefits:

  • They can be more accessible to those who are not homeowners
  • Unsecured loans can have lower interest rates if you have a good credit history
  • Some unsecured loans may offer additional features, including payment holidays or cash back on completion of repayment.
  • There is some flexibility with an unsecured loan as you can usually choose the time period over which you can make repayments.

However, an unsecured loan may not be the right choice and there are some downsides:

  • If you have a poor credit rating it may be more difficult to get an unsecured loan. If you do arrange a loan, it may be at a less preferential rate, meaning you’ll pay higher rates of interest.
  • Without the security of collateral, unsecured loans are seen as higher risk and in comparison to secured loans will typically have higher interest rates.
  • While it is best not to borrow more than you can afford, some lenders will offer a better interest rate on a higher amount.
  • Some lenders require an arrangement fee, which is an added cost.
  • If you want to repay the full sum of the loan before the agreed timeframe, some lenders will charge an early repayment fee.
Poor credit rating: can I get an unsecured loan?

If you have a poor credit rating it can be more difficult to get an unsecured loan, but not impossible. Lenders are more cautious about allowing people to borrow money without collateral but there are ways around it:

Guarantor loan – a guarantor, such as a friend or family member, will agree to repay the loan should you be unable to keep up the payments. The key disadvantage of this arrangement is that your guarantor will be left in debt should you default on the loan.
Credit building credit card – the key to a good credit rating is proof of a history of maintaining payments on debt. A credit building credit card will allow you to borrow a small amount of money and demonstrate your ability to keep up repayments. The amount you would be allowed to borrow is typically much smaller, between £100 and £1200.

Things to think about before applying for a loan

Applying for a loan and being declined can adversely affect your credit rating, so it is worth looking up your credit rating prior to making the application. It is also informative to conduct an unsecured loans comparison to ensure hat you get the best APR and conditions. From there, you can calculate the monthly payments and work out the total amount payable.

What are the alternatives to personal loans?

There are other options beyond personal loans, particularly if you prefer not to borrow at a higher interest rate or you can’t get one due to bad credit history.

By using a house or a car as collateral, those with poor credit history may find it easier to be accepted for a loan. If you default on your loan repayments, you could risk losing the collateral.

A credit card allows you to borrow smaller amounts, often with 0% interest on purchases or balance transfers. A credit card can also be used to consolidate debts. An unsecured loans comparison will help with contrasting the rates associated with the different product types.

An overdraft provides the opportunity to borrow a small amount on a temporary basis. Most banks will allow you to borrow around £500 interest-free.