Best Loans Articles

The majority of people in the UK often find themselves in the position where they may need to borrow money in some form or another.

Even if a person is currently in a situation where they are debt free, with no loans or credit card bills outstanding, they have probably owed money at some time in their past, or will require a loan of some kind in the future. For those people who need to borrow money, for whatever reason, there is a wide range of funding options to choose from, all of which have their benefits and pitfalls.

Different types of credit are more suitable for different purposes, for example a credit card or overdraft facility on a current account may be appropriate for short term borrowing for just a few months, whereas for things like house purchase, a mortgage or homeowner loan would be a far more sensible choice. One of the most popular and most versatile methods of borrowing money is through an unsecured loan and in this article we will consider the advantage and disadvantages of borrowing money in this way.

Just because we are focusing on unsecured loans does not necessarily mean that this is the best solution for a particular borrowing need and someone should carefully consider all the possible options (including not borrowing at all) before taking out a loan of any kind.

Personal unsecured loans are probably the most popular way for an individual to borrow relatively low to medium sized sums of money, largely due to their simplicity and the fact that they are usually quick and easy to arrange.

In a large number of cases, the loan application can be submitted either at the applicants local bank, over the telephone, or online via the lenders website and very often the borrower will receive an almost instant decision on whether the loan has been accepted or not, with the funds being transferred direct to the borrower’s bank account on the same day as the application is made. This is possible due to the fact that the lender only has to take into account the applicants personal circumstances, their credit rating and ability to be able to afford and manage the monthly loan repayments.

As the name suggests, an unsecured loan does not require any form of security to protect the lender and therefore no assessment of security or valuation is required as the loan is not tied to a borrower’s house or other property in the same way that a secured loan would be (although we will come back to this point later on).

Unsecured loans are covered under the Consumer Credit Act, which offers extra protection to borrowers and a cooling off period after the loan application has been accepted, during which time the customer is able to change their mind without obligation and cancel the loan in full.

The amount which can be borrowed on an unsecured loan varies between different lenders and also on the applicants personal circumstances, but in most cases they range from a minimum amount of around £1,000 and go up to a maximum of £25,000 (as this is the limit which is covered under the Consumer Credit Act). Once the loan has been granted, the money may be used for any legal purpose, from the purchase of a new car, a holiday or as a debt consolidation loan to repay more expensive credit card and personal loan debts.

Whilst unsecured loans remain extremely popular, due to their flexibility and speed of completion, they also have their disadvantages, as well as plus points.

Because the lender requires no form of security for the loan, to protect themselves in the case of default, this represents a higher risk to the loan company and as a result of this additional risk, an unsecured loan will usually charge a higher rate of interest than, for example, a secured loan and is usually only available for borrowing funds over a relatively short to medium period of time, with the maximum term for an unsecured loan usually being seven years, although in many cases this is often five years.

Due to the relatively high interest rates charged, along with the short term of the loan, this can make the monthly repayments on an unsecured loan quite expensive, compared with longer term secured loans, where the interest rate is lower and the capital repayments are spread out over a much longer period.

The other main factor to take into account with an unsecured loan is that, due to the additional risk to the lender it is harder for a borrower to be accepted for the loan they require, particularly if they have anything less than a perfectly clean credit history and any applicant who may, for example, have a County Court Judgement (CCJ) against them, or has missed payments or arrears on a previous loan, is likely to be rejected for the loan, or at least have to pay a much higher interest rate on the loan in order to compensate for the increased risk to the lender.

As we have already mentioned, the maximum sum which may be borrowed via an unsecured loan is £25,000 and therefore if someone wishes to take out a loan in excess of this amount, then they will have to consider a secured loan, or a homeowner loan.

It would be reasonable to expect that the interest rate charged on an unsecured loan would increase in line with the amount borrowed. In fact the reverse is actually the case. A small loan of £5,000 for example, will probably charge a much higher interest rate than one for £20,000. In some cases, this can be a few additional percentage points on the chargeable rate and it can sometimes be in a borrower’s interest to actually take a larger loan than they require in order to obtain a cheaper loan rate, although they should be careful not to borrow more than they need just for the sake of a slightly cheaper interest rate.

We have also previously mentioned that, by its very nature, an unsecured loan will not take a charge over a borrower’s home or other property and this is the case. However, if a borrower falls into arrears, or defaults on their unsecured loan repayments, it is possible for the lender to apply to the courts for a charging order. If this is granted, the lender is able to take a legal charge over the borrower’s property (in just the same way as a secured loan would do) and can therefore recoup the outstanding balance of the unsecured loan, plus any unpaid interest and penalty charges, from the borrower’s home through repossession of the property if necessary, although this approach should only be adopted by the lender as a last resort.

In recent months, with the credit crunch and recession causing many borrowers to fall into an arrears situation with their loan, lenders are starting to use charging orders on a far more regular basis as a means of getting their money back from loan customers in default.

In this article, we have attempted to outline the main points to consider when applying for an unsecured loan, looking at the good, the bad and the downright ugly factors which need to be taken into account before making an application.

For anyone who may be thinking about an unsecured loan, it is well worth shopping around, as interest rates can vary greatly between different banks, building societies and loan companies. Better still is to take advice from a professional, independent financial adviser, or loan broker, who will be able to advise you not only on the best kind of loan to meet your specific personal requirements, but also on the best lender to provide the loan itself and although such an adviser may charge a fee, or take commission from the lender for their services, this can still save the borrower a lot of time and even money in obtaining the most appropriate cheap loan to meet their needs.