All About Unsecured Personal Loans
An Unsecured Personal Loan is a type of loan that is not secured against an asset that you own.
This means you can apply for a loan without having to use what you are purchasing, or something you own, as collateral. Like using your car or house as security in case you are unable to repay the loan.
Here is the JN Bank UK guide on everything you need to know about Unsecured Personal Loans. What they are, the different types, the benefits, and drawbacks, and more.
Written by Harvey Perry
JN Bank UK Digital Marketing Executive
As we said, an unsecured personal loan is a loan that you can apply for, without having to put an asset up for security. It’s important to understand the difference because some people may be cautious of them. Some may not want to use any of their assets as security, and some may not have any assets to use as security for the loan.
There are many reasons you could apply for an unsecured personal loan. It could be a home improvement plan that you have, a holiday, a car loan, or any other big life event such as a wedding or event. There are other reasons you could use your loan, but there is a list of things you cannot use a JN Bank UK loan for:
- Buy shares/stocks
- Make a deposit for a house
- Pay a tax bill
When applying for a loan, you will tell the lender the amount you wish to borrow, and how long you would like to pay it back. In return, the lender will need some of your details to help them assess your loan eligibility and also the affordability of the loan you are applying for. Once you have completed the loan application and accepted the loan documents, the interest rate, and terms and conditions, you will receive the money.
There are a few types of loans, and it’s important to know the difference between them before applying. Here are examples of the different types of loans.
Unsecured Loans are not secured against an asset such as your car, or what you buy with your loan. Secured Loans are the complete opposite of this. With a secured loan, you are required to secure the loan in the event you are unable to keep up with your repayments. The asset that has been put down as security will be used to offset the cost of the loan amount you are unable to pay.
Fixed Rate Loans
For Fixed Rate Loans, your interest rate will remain the same for the entire duration of your loan term. You will know exactly how much you need to pay for your regular payment plan, over the course of the term.
Variable Rate Loans
A Variable Rate loan can change during the term of your loan, and it can change for many different factors. Many mortgages are sold at a variable rate also.
If someone was to apply for a loan with bad credit, they may be offered a loan through a guarantor. If the borrower can't keep up with their payments, the guarantor would take over responsibility.
Personal Lines of Credit
Having personal lines of credit is similar to having a credit card. The borrower is given a pre-determined credit limit of which you can draw as much or as little as you need. They can withdraw what they need, and only pay interest on the amount they have borrowed.
No one likes to think of the cons when applying for anything, but it's important to understand them because loans are a serious commitment. Let’s look at the pros and cons of unsecured personal loans.
- You are not required to secure your loan against an asset, such as your house, a car, or what you purchase with the loan.
- You can use an unsecured personal loan for a wide variety of purposes. Such as home improvements, emergency repairs, car loans, holidays, debt consolidation, and more.
- The online application for applying for a loan is often quick.
- There can be a higher interest rate on the loan you have borrowed. As the lender takes more risk in lending the money, these loans have a higher interest rate as they are not secured against an asset.
- Your credit history and financial stability are considered by the lender when deciding to give you a loan. If you have negative points on your credit file, it may be more difficult for you to be accepted for a loan.
- Once you have the money, it is your financial responsibility to keep up with your repayments. Unsecured personal loans are also required to be paid off within a specific period, typically 1-5 years, and it's important to pay the loan off by the end date.
Applying for an unsecured personal loan is a serious commitment and not one to be taken without planning. You can be committed to paying a loan for up to 5 years, so it's important to do your research.
Your credit score
When applying for an unsecured personal loan, you will typically go through both a soft credit search and a hard credit search. The hard credit search will appear on your credit file. Addressing any areas for improvement on your credit file before applying, may improve your chances of being accepted. Experian will allow you to see your credit score for free, without impact.
Most online applications for unsecured personal loans will include a loan calculator. You can use this to assess if you can afford the loan repayments, each month, at the current interest rate. You should calculate your monthly income and expenses, then how much the loan would cost you monthly and over the full term. Understanding this before applying will help you assess your own financial stability over the course of the loan.
Now that you understand more about unsecured personal loans, let’s look at the steps you take when applying for a loan.
Get important information and documents together
Gather any important, personal documents that could be required by the lender to prove your identity, income, and expenses.
Start and complete the application
Begin applying for your loan and make sure you are accurately providing the information that is requested in the application. Most applications are easy to follow, and you can complete them on a desktop, mobile device, or tablet.
Receive and review your loan terms
Before accepting your loan, it's important to review your loan documents. The interest rate offered, the monthly payments, the total loan amount, and other important details.
Accepting your loan
After signing your agreement, which should include your terms and conditions, and other important documents relevant to your loan, the loan should be with you over the next few business days. This could be sooner depending on the lender and your personal bank.