What is an unsecured personal loan?

An unsecured personal loan is a relatively small, fixed rate loan that is taken out for personal use. Personal loans are usually for amounts ranging between £500 and £25,000. Because an asset does not secure the lending, eligibility for this type of personal loan is based upon the credit rating of the borrower. This will determine the APR based on the amount of risk he poses to the lender.

Reasons to choose an unsecured personal loan

  • Small value purchases – personal loans are better suited to small amounts of borrowing as they are usually set at a fixed interest rate over a fixed repayment term.
  • You are not a homeowner – if you rent your property, an unsecured personal loan is the only option as the property is not yours to secure any borrowing against.

Best candidates for unsecured personal loans

  • Those with good credit ratings – because the borrowing is not secured against an asset, the risk is left with the bank. Lending to someone with prior proof of good financial management lowers the risk to the creditor.
  • Those who have lived at the same address for a long time – this improves the credit score needed to obtain the loan.
  • Those who have job security – candidates with a secure job have more chance of making continued repayments thus lowering the risk to the bank.
  • Those who have a good relationship with their bank – existing customers often get preferential personal loans from the lender with whom they hold a current account.

Considerations of an unsecured personal loan

Although your home is not at risk with a personal loan, lenders still have the legal right to recover the money should payments not be made.

If the debt is small, but unpaid, lenders can arrange for a CCJ (County Court Judgement) to be issued against you. With further debt, bailiffs may be sent to your home to take away possessions to the value of the debt owed and sell them at auction.

In cases where the unpaid debt is high, the lender may take you to court. This is expensive, and you will have to cover these costs. In extreme circumstances, the court can rule that your home or property must be sold in order to repay the debt. As well as this, the court has the power to make you bankrupt as a result of non-repayment of  unsecured loans.

Tips for borrowing

  1. Only borrow what you can afford to repay.
  2. Draw up a monthly budget, which will help you to manage your finances each month. You can download our monthly budget planner here.
  3. If you find that you are struggling to make your repayments, do not ignore the problem. Talk to your lender about options available to you such as extending the loan term so that the monthly repayments are lowered, or alternatively seek advice from the Money Advice Service who can be found at www.moneyadviceservice.org.uk.