Loans Expert

An “unsecured” loan is a loan that requires no collateral, that is assets, typically in the form of equity in a property (its value over and above any amount owed on it) but also jewellery, securities, etc. to be pledged by a borrower as security on the value of the loan. This type of loan is typically taken out for personal or family purposes, home improvements, holidays, buying a car, etc. and may be suitable for anyone looking for funding for any legal, non-business related purpose up to ?15,000 or so in value.

In contrast to a “secured” loan, a mortgage loan taken out for the purchase of a property for instance, an unsecured loan is usually for a smaller amount and is therefore repaid over a correspondingly shorter period, usually up to a maximum of 10 years. So-called “personal” loans advertised by banks, building societies and other lenders are typically “unsecured” in nature. In other words, a personal loan is a type of unsecured loan so the terms are interchangeable in most cases.

Prospective borrowers should, however, be aware that car loans, that is loans that can be used solely for the purchase of a car, may be described as “secured” but collateral is in the value of the vehicle itself rather than in property or other assets.

Unsecured Loan Features, Benefits & Considerations

One of the principle advantages of an unsecured loan, of course, is that you do not need to own a property or other valuable assets in order to apply for one. Another is that the typical APR (“Annual Percentage Rate”) associated with a unsecured loan is much lower than that associated with credit or store cards, so an unsecured loan may prove to be less expensive for smaller purchases or indeed as a method of debt consolidation. Replacing multiple high interest credit card debts with a single unsecured loan debt may, for example, cut your monthly spend and allow you to pay less interest overall.

Unsecured loans are also typically quick to arrange. Funds can be at your disposal within a day or two of acceptance, provided, of course, that you meet the lending criteria. The terms and conditions of any unsecured loan are based on the level of risk perceived by a lender. Unsecured loans are inherently more risky than secured loans because lenders have no guarantee that they will be able to recover their debt if a borrower defaults on a loan.

Lending criteria are therefore correspondingly tighter and a borrower will need to produce evidence of regular earnings, a good credit history and sufficient “disposable” income to be able to comfortably service the debt. Even so, unsecured loan applicants can typically expect to be offered lesser amounts and higher interest rates, typically up to 2% higher than secured loan applicants.

The provision of an unsecured loan does not require security in the form of property or anything else from the point of view of the lender but lenders still often prefer homeowners to other borrowers. An unsecured loan allows a homeowner to preserve the equity in his or her home and to avoid the risk of repossession in the event that he or she fails to keep up the repayments on a loan secured on it. This does not, of course, strip responsibility for the repayment of a loan from a borrower. Lenders still have recourse to legal proceedings for the recovery of debt which will take into account the assets of the borrower even if the loan itself is unsecured.

Whether or not you are a homeowner, it may pay to shop around for the unsecured loan best suited to your own individual financial circumstances. Unsecured loans are typically designed to be repaid by fixed monthly repayments over a fixed period of time at a fixed interest rate and offer little in the way of flexibility. You cannot typically adjust the level of repayment, up or down, for the duration of the repayment term and you cannot repay the full amount early without incurring penalty charges. If there is a likelihood of your being able to repay an unsecured loan early, it may be advisable to look for a slightly shorter repayment term if you can afford to or a loan that allows early repayment without penalty. It may also be possible to find an unsecured loan that offers flexible repayments, payment “holidays”, etc. Such loans typically have slightly higher interest rates but repaying the loan early without penalty may help to offset the additional cost.

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Tags: Personal Loans, Unsecured Personal Loans