A quick guide to unsecured loans

Imagine, falling into an emergency with an empty bank account. Does it raise your blood pressure? Doesn’t your happiness vanish? Indeed, it does. The matter aggravates when you have no one to bank upon, no property or asset to offer as collateral or you don’t want to put your beautiful home at risk, to get those much-needed funds. Unsecured loans are the perfect instruments to rescue you from such a situation.

The greatness of unsecured loans is that they are designed for borrowers who do not have anything to offer as collateral. The lender who provides the unsecured loan has no claim to the property or assets of the debtor, should they fail to repay the loan on time. Unsecured loans are given on the creditworthiness of the borrower. 

Many people in the UK have CCJs against them and are plagued by debt issues. The lenders, who thrive on the interest they get on their loans, consider lending to such people a risky proposition. To counter the risk involved in such a loan the interest, they charge on unsecured loans is often higher than the secured loans.

Since, there is no collateral, which the lender can possess and sell to recover his money in case of default, he wants to ensure the creditworthiness of the borrower before giving any loan. Unsecured loans, due to this reason are given after a thorough check of the borrower’s credit history and financial condition.

Unsecured Loans are a risky business. The lenders are wary of giving large sums as loan. So, the amounts shown are smaller. Usually, with an unsecured loan, one can get anything between £500 and £ 25000.

The repayment schedule of the unsecured loan is designed to increase the profit and minimize the risk for the lender. Most lenders will give you the option to repay the loan between periods of six months to ten years. The longer the tenure of the loan, the greater is the interest you pay on it. It is in the interest of the borrower to decide on a monthly instalment that doesn’t pinch him and makes the repayment period as shorter as possible. This is often a tricky situation, but with consistent financial discipline, the borrower can salvage the situation. 

There are many advantages to getting an unsecured loan. The application given for any unsecured loans is approved faster than those for secured loans. The simple reason being that there is no property valuation to be done since no collateral is offered. The fees associated with property valuation is also absent in the case of unsecured loans. Unsecured loans are available to borrowers having CCJ’s or unfavourable credit ratings, but a good credit record helps in getting a better deal. 

Unsecured loans can be used for a variety of purposes, some of which are enumerated below:

  • It can be used to fund that dream cruise or beach holiday.
  • It can be used to get funds to carry out home improvements. 
  • It can be used to pay off existing debt, or consolidate multiple debts into one and ease the repayment problem.
  • It can be used to cover arrears in mortgage repayments and to make it more manageable over a more extended repayment period.

A borrower can get an unsecured loan at a rate different from the rate advertised by the lender. Depending on your creditworthiness and the amount you want to borrow, he might charge you a higher interest rate or provide a loan at a lower interest than the one advertised.

As is true with all other loans, the unsecured loan must also be repaid on time. Non- payment of the instalments or default might attract legal action from the lender to recover his amount. If he is forced to take such a drastic step, it will reflect poorly on the creditworthiness of the borrower.

A quick guide to secured loans

Secured loans are offered against collateral. These loans are less risky for the lender so, they come with lower interest rates and easy repayment options. The borrower has to pledge his house or any other asset as the collateral. Secured loans can provide for massive amounts depending upon the value of the collateral. Hence, they are suitable to finance significant needs.

As the name suggests, a secured loan is a loan given to the borrower on a condition that he provides the lender with something as a security to the loan amount. Generally, the protection offered is the borrower’s home. The property pledged as the security is called collateral.

Secured loans are not risky for the lenders since they have something from which they can recover their loan amount if the borrower fails to repay. For this reason, secured loans are offered at lower interest rates than unsecured ones.

Secured loans are easier to get because of the collateral offered. The ability to provide collateral makes the secured loan accessible to a whole lot of persons. People who are otherwise unable to prove their creditworthiness can get a secured loan if they have something to offer as collateral for the loan.

Secured loans can be taken for a wide variety of purposes; in fact, any financial need can be fulfilled via a secured loan. Debt consolidation is one of the most popular reasons why people take a secured loan.

Depending on the value of the collateral offered the loan amount can range from £3,000 to £50,000. The lenders are not hesitant to provide a higher amount. If they are satisfied that the collateral is of sufficiently high value, they can even consider lending £100,000 or more.

The repayment options available with secured loans vary with lenders. Generally, they are based on the agreement between the borrower and the lender. The repayment period might range between three years to twenty-five years. A prepayment penalty may be charged if you repay the loan earlier than the agreed period.

The process of getting a secured loan has many costs associated with it. Since collateral is under question, the lender has to satisfy himself whether the value of the collateral is sufficiently high or not. If the collateral is your home, then he might have to get your property valued, and this will incur some valuation charges. Solicitor’s fees for preparing the legal agreement, the conveyance to the property site, and office charges are also included in the cost of getting a secured loan.

The process of applying for Secured Loans are relatively straightforward. Nowadays, many lenders are having their websites. A borrower can submit an online application for such a loan request. He can also submit his application over the phone or into any of their offices.

The process of getting approval for a secured loan is a little longer than the unsecured ones. The cause of the delay is the valuation of the property or collateral. The paperwork that has to be done in pledging the collateral also takes time. Lenders will also take the help of credit rating agencies to get a clear picture of your credit history. All these formalities will be completed within a few weeks, and you can hear about your loan within 30 days of applying.

Every lending institution has a legal obligation to inform you about the interest they will charge on your loan. The APR (Annual Percentage Rate) is the most suitable indicator of this factor. The APR charged from you will depend upon your creditworthiness and equity in the property. The borrower should try to get the loan with the lowest APR since it will help him pay the loan quickly.

Taking a loan is a legal process and brings financial liability to the borrower. While taking a loan, a credit agreement has to be signed. The terms and conditions of which are binding on both the borrower and the lender. This fact itself should encourage the borrower to get into the minutest details of the loan agreement and get everything clear before signing on the dotted line.