What Is an Unsecured Loan?

Taking out a loan is a big decision. Not only do you need to be sure you find the best deal, but also the best type of loan for your situation. The types of personal loans on offer vary a great deal, but basically there are two main types of loans available, and these are the secured loan, and the unsecured loan.

Secured Loans:

Very simply, a secured loan is a loan that provides security for the lender, with an asset such as a house. For this reason, anyone applying for a secured loan is normally allowed to have a poor credit history, but should be a homeowner. Secured loans are generally for borrowing larger amounts of money, anything between £3,000 and £60,000, although the upper limit varies according to lender. As with unsecured loans, a secured loan also requires that you make monthly repayments to repay. However, defaulting on a secured loan could put your home at risk, so it’s important to bear in mind that it’s sensible to take out a secured loan only if you are absolutely sure you can meet repayments.

Unsecured Loans:

An unsecured loan is a personal loan that has no security to offset the risk to the lender, and so isn’t secured against a high value asset. As such, an unsecured loan is used for borrowing smaller amounts of money. Traditionally, high street banks made personal unsecured loans available, but the recent financial crisis has seen other types of credit providers take over. However, if you have bad credit than your options will be more limited.

Unsecured loan deals normally provide amounts of up to £5,000, and the loan term is much shorter. However, because an unsecured loan is a contractual agreement which isn’t secured against an asset such as house or car, then the APR rates are higher due to the risk involved for the lender. Types of unsecured personal loan range from credit cards, to payday loans and guarantor loans.

Bad Credit Unsecured Loans:

Taking out any type of bad credit loan will always cost more due to the risks involved for the lender. However, an unsecured guarantor loan offers security from a third party who has agreed to take responsibility for the loan if the borrower defaults. So for this reason, guarantor loans are one of the cheaper options.  APR rates are lower due to the lender having had the risk of default removed. However, it’s still important for the borrower to repay to avoid creating an adverse credit history for themselves, because taking out a guarantor loan also makes it possible to start rebuilding a poor credit score.

Some questions to ask before choosing any type of unsecured loans would be:

  1. How much can I afford to borrow?
  2. What is the APR rate?
  3. How long do I make repayments for?
  4. Does the lender allow early repayment?
  5. Are there any penalties or charges for early repayment?

Finally, a good online comparison site can help you find the best deal – always shop around, and make sure you ask the questions outlined above.