Not quite sure what an unsecured loan is or how it works? You’ve come to the right place, as we explain the ins and outs of unsecured loans.
If you’re just after some funds, it can be time-consuming to wrap your head around all of the different loan jargon. To guide you through the world of loans, we’ve answered these common questions about unsecured loans:
What does unsecured loan mean?
Put simply, an unsecured loan is a loan that isn’t secured to your home. This means that you can apply for an unsecured loan if you haven’t stepped onto the property ladder yet.
Because an unsecured loan isn’t tied to anything, your home won’t be at risk if you struggle to meet your payments. However, because lenders haven’t got that added reassurance of your home, you’ll usually need a fairly good credit score to get accepted for the best rates.
To make matters confusing, an unsecured loan is often called a personal loan. There is no difference between an unsecured loan and a personal loan; they’re simply two different names for exactly the same thing.
The difference between secured and unsecured loan
A secured loan is a loan that you borrow against your home. An unsecured loan, as you might have guessed, isn’t borrowed against anything; so you don’t need to own your home to apply for one.
Because of this key difference, there are a few things that make an unsecured loan a little different:
You might need a better credit score
As you aren’t offering the security of your home, lenders are relying on your credit history to see if you’ll make your repayments on time.
The amount you can borrow is different
With an unsecured loan, you can typically borrow from £1,000 up to £25,000. With a secured loan, however, you can borrow from £10,000 up to £500,000 – though how much you can borrow exactly will depend on the value of your home.
You don’t need to be a homeowner
While both are totally safe ways to borrow if you meet your repayments, you won’t need to think about your home being at risk if the worst happens.
What is an unsecured loan broker?
A broker is a company or individual who finds you a loan to match your circumstances. They’ll take a look at your credit history to find the best loan available for you and either choose a loan from a select panel of lenders or any provider.
An unsecured loan broker will simply find you a personal loan to suit your requirements. Sometimes they are completely free to use; they’ll make their commission from the lender they refer you to. Other times, you could be charged a fee.
What is an unsecured business loan?
If you need some help to get your business off the ground, an unsecured business loan might be the support you need. An unsecured business loan would allow you to buy things like property or equipment to help your business grow.
Just like a normal unsecured loan, you won’t have to offer anything as security to borrow against the loan. However, a personal guarantee will often be required, which means that the director will have to repay the loan if the business can’t. Because of the guarantee, you can borrow up to around £500,000.
What is the maximum you can borrow with an unsecured loan?
The amount you can borrow will vary from lender to lender. To give you an idea, we offer personal unsecured loans up to £15,000 – but on the higher end, there is usually a cap at around £25,000.
Your affordability and credit score will also play a part in how much you can borrow. Lenders looking at your credit report will want to make sure you can comfortably afford the monthly repayments.
Do unsecured loans hurt your credit score?
If you meet all of your repayments on time, an unsecured loan can actually improve your credit score. Each time you meet a payment, a tick will appear on your credit report showing that you’re a responsible borrower.
Once you pay off the entire loan, you’ll prove that you can manage debt over a longer period. Lenders love to see this on your credit report and it could put you in a better position to apply for future credit and better deals.
After you apply for an unsecured loan, you might see your credit score dip a little. Don’t worry though – this will soon pick up once you’ve started to repay your loan.
What are the benefits of an unsecured loan?
Compared to secured loans, there are a couple of advantages you might come across. For example:
You don’t need to be a homeowner
If you’re yet to step onto the property ladder, you’re free to apply for an unsecured loan
You can receive your loan quickly
Without all of the home checks that you’ll have with a secured loan, you could receive an unsecured loan within the same day you’ve applied – in some cases, even minutes!
What happens if you default on an unsecured loan?
If you can’t keep up with your loan repayments, you might:
- Be charged a fee and interest on any missed payments
- Hurt your credit record
- Receive a county court judgement (CCJ)
- Have to declare yourself bankrupt
If you’ve missed between 3 and 6 payments on your loan, you could receive a default notice. This outlines what terms you have broken and what you need to do next.
This default notice would be added to your credit report, which could make it more difficult to borrow in the future.
Before it gets to this point though, it’s important to tell your lender if you’re struggling. They could give you extra time to make your repayment and agree to not report it to the credit reference agencies
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