03 Oct 2018, Author:

Personal loans are usually offered as either secured or unsecured. The difference between a secured and unsecured loan is that secured loans require an asset or property, such as a house or a car, in order to borrow. If you’re not a home owner, or you don’t have any other assets, then you’re most likely to be offered an unsecured loan.


How does an unsecured personal loan work?

If you’re borrowing on an unsecured basis then the lender will look at factors such as your credit history and your income. They will use this to determine whether or not you are a good credit risk. So, if you have a great credit score and a steady income this will work in your favour. Unsecured loans for bad credit are also available but you may not get the same favourable rates of interest if you have credit issues in your financial history.


The difference between secured and unsecured loans

A secured loan requires an asset to which the borrowing can be linked. If you are not able to make repayments on the loan then the lender will use the value of the asset to cover its costs. So, for example, if you borrow a secured loan against your home, if you default on repayments, the lender could potentially take possession of your property and sell it to cover what you owe.


Unsecured loans – the key questions

  • Where can I get an unsecured loan?
    A range of different lenders offer this type of borrowing, including high street banks. Many people choose to look for unsecured loans online because they may be cheaper and offer better rates of interest.
  • Do unsecured loans hurt your credit score?
    It depends whether you are able to stick to the terms of the agreement. If you make all your repayments on time and repay the loan in full then an unsecured loan could actually improve your credit score. However, if you miss repayments, make them late or default on the loan then this may damage your credit score.
  • How much can I borrow on an unsecured loan?
    There are a number of different factors involved:
  • Different types of loans may have maximum limits. For example, payday loans are unsecured and usually borrowed in fairly small amounts. Longer term loans may offer more flexibility.
  • Lenders will look at your credit history to make a judgment. If you have a good credit history with no issues with debt then you’re much more likely to be offered a larger loan than where your credit report shows defaults or problems.
  • Your income will have a part to play. The higher your income, the more likely you are to be offered a bigger loan. The larger the loan, the more sizeable the monthly repayments will be so how much you earn will have an impact on what you can afford to repay.
  • Affordability is crucial. Any lender will look at your current financial position and make an assessment about whether the loan is affordable for you. This means assessing how much will be left for you to live off every month once the loan has been repaid and your main outgoings have left your account. It’s important not to borrow more than you can afford to repay.

What are the benefits of unsecured loans?

  • Plenty of choice. Different types of unsecured loans are available, depending on how much you want to borrow and how long you want to borrow it for.
  • You can choose the level of borrowing that is affordable for you. Unsecured loans are usually offered for between £3,000 and £10,000.
  • You don’t need to be a homeowner – or own another asset, such as a car – to be eligible for unsecured loans. All you need is a steady income and a positive credit history.
  • If you’ve had issues with credit in the past then you may still be able to borrow, as there are unsecured loans available for those with bad credit too.
  • Unsecured loans can be cheaper. Factors such as your credit score will have an impact on the unsecured loan rates that are offered to you. It’s often the case that this type of borrowing is cheaper than other debt, such as a credit card.
  • Unsecured loans for bad credit. If you want to start improving your credit score, an unsecured loan can help you to do it. Just make sure you repay on time and in full.
  • You can manage your repayments so that they are affordable. Unsecured loans are repaid over a period of time that works for you so that the monthly repayments are affordable when combined with your other outgoings.

These are just some of the benefits of unsecured loans that show why they are such a popular way to borrow money today.