Unsecured Loans FAQs

What is an unsecured loan?

What’s the difference between secured and unsecured loans?

What are the types of unsecured loans?

How much can I borrow on an unsecured loan?

What are the requirements for unsecured loans?

What happens if you don’t pay your unsecured debt?

Can I get an unsecured loan when unemployed?

What is a personal loan?

What are Unsecured Business Loans

What is an unsecured loan?

Unsecured loans are a way of borrowing without needing collateral. A lot of the time, lenders will charge higher interest rates and have stricter criteria, such as expecting an excellent credit score from borrowers. 

This is because they are putting themselves at a higher risk by lending to you without security. If the borrower stops making repayments, there is no collateral for the lender to take.

How do unsecured loans work?

Unsecured loans are a lot more straightforward. You borrow a certain amount from your bank or lender, and agree to make regular repayments until the loan is paid off, including interest. 

Your repayments are typically on a monthly direct debit basis, but you can agree on a more suitable repayment plan with your lender if needed. The term of the loan depends on the amount you have borrowed as well as other circumstances, such as your income and monthly outgoings.

What’s the difference between secured and unsecured loans?

There are two types of loans – secured and unsecured – and there are plenty of differences between the two. Firstly, secured loans are a way of borrowing money whilst using a valuable asset as security for the lender. You can offer anything as collateral, as long as it has a lot of value. 

For example, a mortgage is secured on your home. If you fail to repay your mortgage, the house gets repossessed by the lender in order to resell and make their money back. An unsecured loan, however, does not require security. Anyone can take out an unsecured loan if they don’t have a collateral to offer, as long as they fit the lenders’ criteria. 

Another difference between the two is how much you can borrow. Because unsecured loans are much riskier for lenders, the borrowing amounts are generally much smaller. Unsecured loans can allow you to borrow up to £50,000 max, but most lenders don’t lend beyond £15 – £20,000. Secured loans can go as high as millions of pounds, hence why mortgages are a form of secured borrowing. 

Why might you want an unsecured loan?

Unsecured loans are typically used for making smaller purchases and are usually set on a fixed interest rate over an agreed repayment term. But what are unsecured loans used for? 

• Debt consolidation – they work by consolidating all your debts into one big sum. So essentially, rather than making multiple repayments every month, you are making a single repayment to your lender. Note many unsecured lenders don’t like debt consolidation so options may be limited.
• Home Improvements – unsecured loans are great for small home improvements, as they allow you to borrow less than a secured loan, without putting your property at risk.
• Car financing – most unsecured loan lenders will allow you to borrow up to £30,000. This is a very good price cap for a new car.
• Weddings – statistics show that an average wedding in the UK in 2022 will cost you around £20,000. 
• Holidays – some may also take out an unsecured loan to travel to their dream destination, then pay it off quickly.
• Generally goods sold at point of sale such as furniture, white goods etc

In conclusion, unsecured loans can be used for any smaller purchases that you can pay off over a shorter period of time. Typically, around the 3 year mark but it varies.

What are the types of unsecured loans?

Unsecured Loans can either be revolving or fixed term. A credit card is a perfect example of a revolving loan. It’s essentially a credit limit that can be spent, paid off, then spent again. A term loan is a loan that the borrower will repay in full over an agreed period of time with interest. Types of unsecured loans can include:

• Student loans
• Credit cards
• Overdrafts
• Personal loans

It’s important to note that any late or missed payments can very negatively impact your credit score, and therefore make it a lot harder for you to borrow in the future. 

How much can I borrow on an unsecured loan?

Generally, unsecured loan lenders will allow you to borrow between £800 and £25,000. However, this does vary. Each lender is different and has their own specific criteria. If you have a perfect credit score, you may be eligible to borrow more with some lenders, potentially up to £50,000.

If you are only looking to borrow a small amount (£500 for example), a credit card, or arranged overdraft with your bank could be a better option. Beware of payday loans, as they have much higher rates and shorter terms, meaning borrowers struggle to repay them on time.

Are payday loans bad?

First off, let’s explain what payday loans are and how they work. Payday loans are a way of borrowing a small amount of money quickly, until you get paid. They are for borrowing smaller amounts of money, usually no more than £1,000. They tend to be used as a last resort for many people in the case of an emergency, such as fixing your car. 

The reason why they are not recommended is because a payday loan is one of the the most expensive form of borrowing. Their lenders charge very high interest rates and it’s really easy to miss a payment, causing you to get charged with late fees. It’s also extremely easy to get caught up in a damaging debt cycle, meaning you need to borrow more to repay your income shortfall every payday.

The other bad point about payday loans is that having one suggests you can’t get finance elsewhere – a loan of last resort. Therefore most other lenders are less likely to grant you a loan or a mortgage whilst you have a history of using payday loans.

What are the advantages of unsecured loans?

Now that we have discussed the disadvantages, let’s talk about the positives:

• Possibly the most obvious advantage of an unsecured loan, is that your property and assets aren’t at risk of repossession. Even in the event of a default, your valuables are safe.
• Unsecured finance applications are a lot faster to complete, meaning the money can be in your bank within a couple of days.
• You do not have to be a homeowner in order to borrow, meaning anyone can be eligible.
• If you stick to your monthly repayment plan, it can help improve your credit score.

What are the disadvantages of unsecured loans?

Typically, there are more disadvantages for lenders than borrowers with unsecured loans since collateral isn’t needed. With that being said, let’s look at some of the disadvantages of unsecured lending:

• As with any loan, you are borrowing money that must be repaid in full and on time. So the main risk is the consequences you may face if repayments are late or missed.
• Unsecured loans normally come with much higher interest rates, which means you could be paying a lot more overall.
• Unsecured loans are for borrowing less money, so you might not get the amount you want.
• Because they are risky for lenders, they may have strict criteria in place which can make it harder to qualify. A lot of the time, they may refuse to lend to you unless you have excellent credit rating.
• If you don’t have a good credit rating the interest rates offered can escalate very quickly. 49% is quite being typical and payday loans can be 10 times higher.
• They tend to be paid off over a shorter term. This means, if your loan interest rate is quite high and the repayment term is short, your repayments will be bigger.

Will I need a credit check?

Yes. Eligibility for an unsecured loan is heavily impacted by your credit score. A credit check would be completed by the lender in order to determine the decision on your loan application.  

What are the requirements for unsecured loans?

Every lender is different, however most high street lenders will prefer a clean credit history. When you apply, the lender will need some information from you such as:

• Your employment status
• Your salary
• Living costs
• What you need the loan for

They will also perform credit checks and may refuse to lend to you, if they see any missed or late repayments on your report. It’s also important to note that being rejected for a loan in the past also shows up on your credit report, and is even more off-putting to some lenders, as it shows financial difficulty. 

What happens if you don’t pay your unsecured debt?

All repayments on your loans and debts need to be made on time. Failing to do so will not only have a negative impact on your credit, but you may face serious repercussions. Defaulting on an unsecured loan can be taken very seriously. Lenders can take legal action and you may end up with a County Court Judgement demanding you to repay the money owed.

Late payments will do serious damage to your credit score and remain on your report for up to 7 years. Any legal action taken against you will also be a part of your credit history and can be harmful to you if you want to borrow in the future. If you fear you cannot make the repayments on time, contact your lender immediately. That way, they can come up with a solution that works for you both.

Can I get an unsecured loan when unemployed?

Generally speaking, yes. Although, the types of loans and amount you’re offered when unemployed may be limited. You are also likely to be charged a much higher interest rate. If you get any kind of income from part-time work, freelancing, benefits, dividends etc. some lenders will still consider lending to you, provided you can afford the repayments. They will run affordability checks on you first. You may also need a perfect credit rating to boost your chances. If you cant afford it don’t take it

What is a personal loan?

A personal loan is a type of unsecured lending. They can be used for borrowing larger amounts, and paid off over a longer period of time. Personal loans are available from banks as well as other lenders and are normally paid off between 3 and 10 years. You choose your own repayment period and in some cases, you can even pay off the loan quicker without facing any additional fees. 

Personal loans can also be used to consolidate your debts by turning your debt repayments into one monthly payment. This helps you manage your monthly outgoings, though it does also mean paying a lot more interest.

Can I get a personal loan for bad credit?

Personal loans for bad credit are essentially just personal loans that offer more options for borrowers with lower credit scores. Typically, borrowers with bad credit are offered a secured loan, as it’s less risky for the lender. But, borrowing money with bad credit and no collateral is still possible. Beware – it may be expensive and make matters worse if it causes you to fall behind on other debts

Can I get a personal loan for a car?

It is possible to use a personal loan to buy assets such as cars. As this is an unsecured type of borrowing, you will need to pass a credit check first in order to qualify. You can then decide whether you would prefer your loan to be on a fixed or variable rate. 

The biggest benefit of getting a personal loan to finance a new car, is once all checks are complete, the funds are transferred to your bank account fairly quickly. This allows you to purchase the vehicle like a cash buyer with no restrictions. 

HP and other forms of car finance are available. These are generally secured on the vehicle so strictly speaking are not unsecured loans

Can I use a personal loan for my business?

Typically, no. Personal loans are for personal use, meaning they are for funding smaller purchases such as cars or holidays. But, in some cases, lenders may allow you to use a personal loan for business purposes. 

Generally, when applying for a personal loan, the lender will ask how you intend to spend the money. Many lenders have terms and conditions that you must familiarise yourself with first, to see if there are any restrictions. 

However, it is possible to use a personal loan for your business. Most lenders will not allow it, but some will. Be honest and upfront with your lender, and tell them what you intend to do with the money. Personal loan rules are much different to borrowing as a business, that’s why it’s always important to check with your lender. If you need to borrow money for your business, there are many options available, such as unsecured business loans. 

How fast can I get a personal loan?

Usually, the whole process can take a few weeks, but this all depends on your cooperation with your lender, however a lot of the time things may be out of your control. There are things you can do to speed up the process, such as sending all important documents as fast as possible or making sure your credit is accessible for lenders to check.  

What are Unsecured Business Loans

Unsecured Business Loans are exactly what the name suggests. They are loans created for businesses that don’t own any assets, businesses that don’t want to offer collateral or any growing company that needs quick finance.

Can I get an Unsecured Business Loan?

This completely depends on the business’s circumstances. A business may be able to borrow as little as £1,000, and in some cases up to £1 million. Lenders will sometimes specify the loan amount as a multiple of your businesses monthly revenue. They will also consider your trading history and credit score.

Can I get an unsecured loan to start a business?

Yes. There are a number of schemes available to help you start a business. You will need to provide a business plan and a cash flow forecast but loans of £25000 per director or partner can be obtained relatively easily.

Talk to Promise Money for more details

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