What is an Unsecured Loan?
Unsecured loans are what they state in the name. They are approved or declined based on a number of different aspects without the need for security. Instead of pledging assets, you qualify based on your credit history and income. Lenders will take your circumstances, employment status, affordability checks based on your existing borrowing and monthly outgoings to make a decision on your application.
Whether you have good or bad credit, there are lenders who are willing to take a look at applications on a case by case basis.
Types of Unsecured Loans
Unsecured debt comes in several forms:
- Credit cards are a form of unsecured loan. Even though you might not think of them as unsecured loans. You are borrowing money when you spend with any credit card.
- Student loans are, more often than not, unsecured.
- Personal loans, available from banks, credit unions, and most online lenders are unsecured loans.
- Short Term Loans are unsecured, they offer you the facility to borrow a smaller amount over a few months. However, APR and repayments can be high… So only use these in emergencies or if you are fully comfortable with the repayment plan you are signing up to.
- Payday Loans are also unsecured. APR on this type of loan is high, but if you want to borrow £100 and pay it off on payday in 15 days, you’ll pay back approx £112. Again, only use in emergencies, these are not long term solutions.
Types of Secured Loans
- Car loans are usually secured loans. When you borrow to buy a car, the lender has the right to remove your car and sell it to cover any outstanding debt. Although, this is usually if you stop making payments.
- Homeowner loans are also secured. Whether you borrow for your home purchase or you get a second mortgage, your home may be at risk if you fail to repay the loan.
- Business loans can be secured or unsecured. If you are required to make a personal guarantee, you may have to place your home or any other assets as collateral.
Even with secured loans, it’s possible to damage your credit if you stop making payments. The fact that the lender takes your possessions doesn’t change that.
In fact, sometimes the proceeds from the sale of your possessions are not enough to pay off your loan balance. When that happens, you lose the asset, damage your credit score/rating, and still owe money on the original loan because of this. Lenders can also charge penalty fees, which increase the amount you owe. Eventually, lenders may take legal action… You could get a CCJ and potentially a visit from a High Court Enforcement officer!