People in the UK often choose unsecured personal loans when they need to borrow money but don’t want to put up collateral. People usually use these loans for things like paying off debt, making home improvements, or covering unexpected costs. An unsecured personal loan can help you pay for a wedding, get out of credit card debt, or start a new business.
This guide will tell you everything you need to know about unsecured personal loans in the UK. We’ll give you all the information you need to make an informed decision, from how they work and their pros and cons to how to apply for them and use them responsibly.
What are personal loans that aren’t backed by anything?
A personal loan that doesn’t require the borrower to put up any collateral, like their home or car, is called an unsecured personal loan. Instead, the lender looks at the borrower’s credit score and ability to pay back the cash loan. Because lenders take on more risk, these loans usually have higher interest rates than secured loans.
Banks, building societies, and online lenders usually offer unsecured loans. The amounts can be as small as a few hundred pounds or as large as tens of thousands. They have set terms, which are usually between 1 and 5 years, and a set interest rate.
Benefits of Unsecured Personal Loans
No Need for Collateral
One of the best things about an unsecured loan is that you don’t have to put up any assets as collateral. This is especially important for people who don’t own a home or don’t want to put their property at risk.
Quick and simple application process
Applying for an unsecured personal loan is pretty quick and easy. You can apply for and get approved for a loan from many online lenders in just a few hours. Usually, the money is given out within a few days.
Interest Rates That Don’t Change
Most unsecured loans in the UK have fixed interest rates, so you’ll know exactly how much you need to pay back each month for the whole loan term. This gives you peace of mind and makes it easier to plan your money.
Amounts of loans that can change
There are many things you can do with an unsecured loan. An unsecured loan gives you the freedom to meet your needs, whether you’re paying off debt, going on vacation, or paying for medical bills.
No Chance of Losing Your Property
If you don’t pay back an unsecured loan, you won’t lose your home or car because you don’t have to put up collateral. But you should know that not making payments can hurt your credit score.
The bad things about unsecured personal loans
More Interest Rates
Lenders take on more risk with unsecured loans because they don’t have any collateral. To make up for this, interest rates on unsecured loans are usually higher than those on secured loans. This can make borrowing money more expensive overall.
Strict Requirements for Eligibility
Most of the time, lenders have strict rules for unsecured loans. They will check your credit score, income, and past financial behaviour to see if you qualify. If you have a bad credit score, you might not get a loan or you might get one with a higher interest rate.
Less Money for Loans
Unsecured loans usually have lower loan limits than secured loans. You might not be able to borrow as much money as you would with a secured loan if you need a lot of it.
Possible Debt
It’s not too hard to get an unsecured loan, but if you borrow more than you can afford, you could quickly get into debt. Not paying on time can cost you more money and hurt your credit score a lot.
What Makes Unsecured Loans Different from Secured Loans
The main difference between secured and unsecured loans is that secured loans need collateral. For instance, the house you buy with a mortgage is the collateral. If you don’t pay back the loan, the lender can take the property.
Unsecured loans, on the other hand, don’t need collateral, so there is no asset that could be lost. Lenders charge higher interest rates and may have stricter lending standards for unsecured loans, though, because they are taking on more risk.
Why should you get an unsecured loan instead of a secured loan?
Here are some reasons why people in the UK might prefer unsecured loans to secured loans:
No Risk to Assets: An unsecured loan is the best option if you don’t want to put your property at risk.
Faster Processing: Unsecured loans usually get approved and funded faster than secured loans, which can be very helpful in emergencies.
No Need for a Property or Vehicle: Many people don’t have valuable property or assets to use as collateral, so unsecured loans are a good choice for them.
How to Get an Unsecured Personal Loan in the UK
Step 1: Look at Your Credit Score
It’s important to check your credit score before you apply for an unsecured loan. Your credit score will have a big impact on whether or not you can get a loan and what interest rate you can get. You can get a free credit score check from companies like Experian or Equifax.
Step 2: Look at different lenders
Next, you should look at different lenders. Different lenders will give you different amounts of money, terms, and interest rates. Use comparison websites and read customer reviews to find the best lender for you.
Step 3: Figure out the amount and length of the loan
Choose how much money you want to borrow and how long you want the loan to last. Longer loan terms will lower your monthly payments, but you’ll end up paying more in interest overall.
Step 4: Fill out an application
You will need to fill out an application once you have chosen a lender. This will usually need personal information like your name, address, income, and job information.
Step 5: Wait for Approval
Lenders will check your credit and may ask for more proof of your financial situation. If your application is approved, you will get a letter telling you how much the loan is, what the interest rate is, and when you have to pay it back.
Step 6: Accept the Offer and Get the Money
Usually, the money will be sent to your bank account within a few days of your accepting the loan offer.
Unsecured Loans: How to Pay Them Back
In the UK, unsecured loans usually have repayment terms of 1 to 5 years. The amount you have to pay back each month depends on things like the loan amount, the interest rate, and the length of the loan.
For instance:
If you borrow £5,000 at a 6% interest rate for three years, you would have to pay back about £153 a month.
If you make the term longer, to 5 years, your monthly payment goes down to about £97, but you’ll pay more interest in the long run.
Interest Rates on Unsecured Loans in the UK
Depending on your credit score, income, and the lender, interest rates on unsecured loans can be very different. Rates usually range from 3% to 20%, with the best rates going to people with great credit.
Things That Change Interest Rates
- Credit Score: If your credit score is higher, you will usually get a lower interest rate.
- Loan Term: Loans with shorter terms usually have lower interest rates than loans with longer terms.
- Loan Amount: Higher rates may come with larger loan amounts, but this isn’t always the case.
- Lender: Different lenders have different interest rates, so it’s a good idea to compare rates to get the best deal.
Things You Shouldn’t Do When Getting an Unsecured Loan
1. Not looking at your credit score
It’s important to check your credit score before you apply for an unsecured loan. If you have bad credit, you may have to pay more in interest or even be turned down for a loan.
2. Taking out more money than you can pay back
It’s easy to want to borrow more than you need, but you should only borrow what you can easily pay back. Taking out too much money can cause debt and missed payments.
3. Not Making Payments
If you don’t pay back your loans on time, you could face late fees and a lower credit score. Before you take out a loan, make sure you can always make your monthly payments.
4. Not paying attention to loan terms and fees
Read the terms and conditions of a loan carefully before agreeing to it. Know about any extra costs, like hidden fees or penalties for paying off a loan early.
Other options besides unsecured loans in the UK
If you’re thinking about getting a loan, it’s important to know about other options besides unsecured loans in the UK. Some of these are:
Credit Cards: Credit cards can be a flexible way to borrow a small amount of money. But they usually have high interest rates, especially if you have a balance.
Peer-to-Peer Lending: Peer-to-peer lenders help people who need money find individual investors. Sometimes, this can give you lower interest rates than banks and other traditional lenders.
Family Loans: Sometimes borrowing money from family or friends is cheaper, but it’s important to make sure everyone knows how and when to pay it back to avoid hurting relationships.
The end
A lot of people in the UK find unsecured personal loans to be a good way to borrow money. They each have their own pros and cons, but they are a flexible way to get money for a variety of needs without putting your property at risk. Unsecured loans can help you with your finances whether you want to pay off debt, make a big purchase, or deal with an unexpected bill.
Call to Action
Bloom Financials can help you if you’re thinking about applying for an unsecured personal loan or need professional financial advice. Get in touch with us today for professional help and advice on how to choose the best loan for you.
