What are unsecured loans?
An unsecured loan, also known as a personal loan, can be a helpful option for people who want to finance a big purchase, such as a car or a home extension.
In contrast to a secured loan, if you take out an unsecured loan the lender will have no claim on your financial assets if you don’t keep up repayments.
Key elements of an unsecured personal loan
Benefits
- Unsecured loans are usually more widely available.
- The lender does not typically require security in the form of assets such as your home.
- Often unsecured loans allow flexibility with loan amounts and repayment terms.
Things to consider
- If you have a poor credit rating, it can be harder to get approval from a lender for a unsecured loan.
- Lenders may offer a smaller maximum loan amount than they would for a secured loan.
- Falling behind on payments could affect your credit rating and result in late payment charges.
- Unsecured loans often have higher APRs than secured loans, which means they could cost more overall.
The typical cost of an unsecured loan
If you are accepted for an unsecured loan from a bank, building society or other financial institution, you will usually have to pay back interest on what you have borrowed as well as the sum itself. Loans come with varying Annual Percentage Rates (APRs), and this figure determines what the loan will cost over time.
A loan calculator like this one from the Money Advice Service can help you work out the cost of borrowing.
Here’s an example:
| Loan Amount | Loan Term | APR | Total Repayment Cost |
|---|---|---|---|
| $10,000 | 5 years | 5.1% | $11,319.00 |
Things to consider before applying
Is an unsecured loan right for you? Use our checklist to help you decide:
- Confirm that an unsecured loan is a better option for you than a secured loan.
- Look up your credit rating and find out if it might adversely affect your application.
- Do your research and find an APR that you’re happy with.
- Work out the total amount repayable when you take the interest into account.
- Calculate the monthly repayments on your loan and make sure you can afford them.
- Find out if there are any extra costs you need to budget for, such as setup costs or late/early repayment penalties.
How to apply for an unsecured loan
Traditionally, applications needed to be made face to face, but now you can apply for a loan online or over the phone.
For best results, make sure you have the necessary information to hand before you start the loan application process. Typically you will need:
- Your home addresses from the past three years
- Your bank account details
- Financial information including monthly incomings and outgoings
- Your employer’s name and address