With flexible usage, a range of repayment options, and quick funding, an unsecured personal loan can be a great option for anyone looking to raise some extra cash. This might be to fund a large purchase, like a new car; an upcoming event, like a wedding or a holiday. Perhaps a small business loan is what you need? Or even to consolidate existing debts into single, more manageable monthly instalments.
But with a wide range of money lending options to choose from, you might be asking yourself—is an unsecured personal loan right for me?
In this guide, we unpick both the disadvantages and benefits of personal loans, and compare them against other credit options, to help you make an informed choice.
What is an unsecured personal loan?
An unsecured loan, otherwise known as a personal loan, is a lending option that is quick to access and provides flexible use with short-to-medium-term repayment options.
The term ‘unsecured’ means that these loans are not tied to any existing assets, like your home, and instead rely more heavily on credit history to determine eligibility.
Those seeking an unsecured personal loan can expect a set of background checks and an agreement to make regular payments until the loan is fully repaid. This will all be paid alongside any interest owed.
Unsecured loans are commonly taken out for smaller to moderate amounts. The typical personal loan withdrawal can range from £1,000 to £35,000, repayable over terms of 1 to 7 years. For anything lower than £1,000, a credit card may be better suited to your needs.
How does an unsecured personal loan work?
Getting a personal loan is simple. Your first move will be finding and applying to a money lender. These can be banks, credit unions or online personal loan lenders.
The only difficulty here is deciding which lender to choose—and that’s where we come in. By using our free eligibility check tool you can quickly see which lenders best fit your circumstances and make an informed decision.
Our search uses a soft credit check. So don’t worry, it won’t appear in your credit history. Simply put in a little background information and find the right personal loan for you.
Now that you’ve settled on a loan provider, you’ll be asked to complete an application, which the money lender will review. Part of this will be done through a credit check.
If you’re approved, the lender will give you the loan terms, which you can then accept or reject. If you choose to accept, all you have to do is finish the loan paperwork.
Once complete, the money will be paid into your account by the money lender. This will arrive into your bank account through a direct deposit.
When the money is in your account it is yours to use as you see fit and you begin to repay the loan in line with the terms you agreed to in the loan agreement.
What is the difference between a secured and unsecured loan?
In contrast to an unsecured personal loan, a secured loan, often referred to as a homeowner loan, is linked to an asset. This is most commonly borrowed against property, but could also include other valuable collateral, such as a vehicle, cash deposit, stocks, or jewellery.
Lenders often offer larger amounts of money against secured loans and have longer repayment terms. This is because they have the added security of an asset to reclaim if the loan amount isn’t repaid.
You will also find that a high credit score is less crucial to receiving a secured loan, when compared with an unsecured loan. This is because of the attached collateral.
It’s important to bear in mind, therefore, that your home may be repossessed if you do not keep up repayments on any debt secured on it, such as a secured homeowner loan.
Is an unsecured personal loan a good idea?
Unsecured personal loans have both advantages and disadvantages. Whether or not taking one out is a good idea depends on your circumstances. That’s why it is important to understand the pros and cons, before making your choice.
Advantages of an unsecured personal loan
- Larger borrowing amounts than with a credit card.
- You could receive a lower interest on larger amounts than with a credit card or other forms of credit.
- Fixed monthly loan repayments make budgeting easier.
- You can often choose how long you’d like to repay the loan for. However, be aware that the length of repayments can affect the total amount of interest you repay.
Disadvantages of an unsecured personal loan
- Your eligibility is determined by your credit score, in addition to other factors. This means a lower score may result in higher interest rates, while the offered borrowing amounts may be lower than expected, or the application may be rejected altogether.
- Missing a monthly repayment could have a negative impact on your credit score and affect your future chances of accessing credit.
What can you use a personal loan for?
It’s important to remember that it’s not a good idea to take out a loan without a plan on how you’re going to use it.
To help you with your choice, here are some common uses:
Debt consolidation loans
You could use your loan to consolidate your debts into one monthly payment. This is particularly useful if you have a number of high interest credit card debts or debts from other sources. Larger unsecured personal loans tend to come with lower interest rates which can help you save money and secure a lower monthly repayment.
Loans for medical treatment
Private medical care can be costly and often unplanned, or unexpected. A personal medical loan can help to cover the costs of medical treatment, so that you can focus on your health and wellbeing, without needing to worry about bills. If you so desire, you can also put this money towards cosmetic procedures, such as dental implants or cosmetic surgery.
Loans for home improvement
With home related matters, finding the right loan requires the right analysis of what you really need.
For larger home renovations such as an extension or a new kitchen, a secured homeowner loan may be a better option. However, for smaller purchases such as redecorating, or modernising your bathroom, an unsecured loan for home improvements will help you acquire what you need without having to leverage your home.
Unsecured personal loans work particularly well when in need of money for a new vehicle, or funds for unexpected vehicle repairs. With car loans, you can acquire the money in a matter of days, putting you in pole position to make that purchase.
A holiday loan is an unsecured personal loan, used to cover the costs of your next big trip. They can be a great way to finance travel if you want to get things booked in right away, and repay over a few months in the build-up to your getaway.
Anyone that’s planned a wedding knows how stressful, time consuming, and costly it can be to pull off your big day the way you imagined it. A wedding loan can help you to spend less time worrying about where the money is going to come from, so that you can focus on deciding on colour schemes and seating plans.
What is a personal loan cooling-off period?
If you’re having second thoughts about your loan, you can always cancel it as part of the ‘cooling-off period’. This is also often referred to as your ‘right of withdrawal’.
Once the loan agreement is signed, you will enter a 14-day cooling-off period. This will allow you to cancel the credit or loan agreement and applies to all deals made in person, online or over the phone.
This period of time is part of your lawful right to reconsider taking out a financial product. During this time you are not obliged to provide any reason for withdrawing from the agreement.
What to avoid doing with your personal loan
There are some common mistakes people make when taking out a personal loan. You’ll want to avoid these, and they include:
Borrowing more than you can afford to pay back
Taking out a loan in which you cannot afford the repayments can end up costing you more in the long run. Falling behind on payments will lead to late fees having to be paid and your credit score being affected.
Before taking out a loan consider using a personal loan repayment calculator. Doing so will help you estimate your monthly payment and align it to how much you can afford in your budget.
Picking a lender with high costs
To avoid a lender with high costs, always start your money lending journey by gathering quotes from multiple lenders. An easy way to do this is with our eligibility checker. Simply input the amount of money you are looking to borrow, and we’ll find a selection of personal loan quotes tailored to you. The decision will be done in minutes and it won’t affect your credit score.
Ignoring interest and loan costs
Always pay attention to the cost of the loan before taking one out. Being aware of the interest fees simply isn’t enough. You need to think about how much you’re actually paying.
Take, for example, an unsecured personal loan of £10,000, over a 36 month term, with an annual percentage rate (APR) of 8.9%. At the end of the term in this example, assuming all repayments are made on time, you will be repaying the full £10,000, plus an additional £1,373.71 in interest and fees.
To avoid paying more than you can comfortably afford, be sure to thoroughly read your agreement before signing.
Alternative options to an unsecured personal loan
An unsecured personal loan isn’t your only option, and it’s not always the best option depending on the circumstances or amount of money you need to borrow.
For smaller amounts of money
If the amount of money you need is less than £1,000, then it might be worth considering a credit card to cover the costs of your purchase.
Credit cards, for example, can offer you the flexibility of accessing a large amount of money without fixed monthly payments. Bear in mind, these may be less suitable for major expenses as you may be charged a higher rate of interest than you would be eligible for with a personal loan. If you are unable to repay the card in full, this could build up more over time.
If you would prefer to use a credit card to cover a large purchase, then a 0% purchase card may be an option to consider. This would allow you to borrow and repay the debt without additional interest being applied, providing it has been repaid in full within the 0% term. At the end of the term, the interest rate will be applied to any remaining debt.
For large amounts of money
If you are looking to borrow money for something larger, a secured loan or a homeowner loan could be better suited to your needs.
Being able to leverage the value of your home allows you to withdraw a larger sum of money when compared to an unsecured personal loan or credit card. Doing this can help you pay off large debts, buy a new car or renovate your home.
The additional benefit comes with a less intense focus on your credit score, as your home is taken as collateral. The risk comes in the same area. As your home will be at risk of repossession if you fail to make the repayments.
Is an unsecured personal loan right for you?
What is a personal loan?
|A personal, or unsecured loan, is money borrowed from a loan provider, repaid over with a set period with interest.|
How much can you borrow?
|Loan amounts vary between £500 and £50,000.|
What are the repayment terms?
|1 to 7 years. The repayment term refers to the period of time between the start of the loan to the end, once all the money, plus interest, has been repaid.|
Advantages of unsecured loans
|Large borrowing amounts, fixed monthly repayments, lower interest if you have a good credit score.|
Disadvantages of unsecured loans
|Eligibility determined by credit score, unable to borrow more than £50,000, your credit score will be affected if you miss repayments.|
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