What is an Unsecured Loan

by John Mussi

An unsecured loan is a personal loan where the lender has no claim on a homeowner's property should they fail to repay. Instead, the lender is relying solely on the ability of a borrower to meet their loan borrowing repayments.

The amount you are able to borrow can start from as little as £500 and go up to £25,000. Because you not securing the money you are borrowing, lenders tend to limit the value of unsecured loans to £25,000.

The repayment period will range from anywhere between six months and ten years. Unsecured loans are offered by traditional financial institutions like building societies and banks but also recently by the larger supermarkets chains.

An unsecured loan can be used for almost anything - a luxury holiday, a new car, a wedding, or home improvements.

An unsecured loan is good for people who are not homeowners and cannot obtain a secured loan for example; a tenant living in rented accommodation.

There are a few things to consider before applying for an unsecured loan:

Unsecured loans are invariably more expensive than secured loans, and the repayment periods demanded by lenders are shorter too.

This is because they have no guarantee that you can repay the loan, and therefore charge you more in interest to cover the cost of insurance policies that they need to take out to protect them should you default on repayments.

In the event that a borrower does not pay up, the lender will invoke the terms of the legally-binding credit agreement and pursue the borrower through the legal system.

Lenders are obliged by law to tell you how much they charge for this type of finance and this is worked out as an annual percentage rate (APR).

Ask whether the APR figure quoted is ‘typical' or is what every applicant is charged.

You should also investigate whether the interest rate charged is fixed for the lifetime of the loan repayment period, or whether it varies with the base rate.

Check too on whether there are early repayment penalties.
Unsecured loans vary from lender to lender, so it pays to shop around before making a final decision.