The basics of borrowing, with unsecured personal loans explained.
Unsecured personal loans can provide an accessible and affordable way of borrowing whether you want to buy a new car or plan the holiday of a lifetime. Unsecured loans let you do this without using your property to guarantee your repayments.
They are a flexible means of borrowing anything between £1,000 and £25,000 over a loan period ranging from one to five years. This means that you can to tailor the amount you borrow, the loan period and consequently the monthly repayments to fit your income.
Consequently, if you plan your finances correctly and find the best unsecured personal loans, they can be used for anything from home improvements to buying a car; they can even used as unsecured debt consolidation loans.
There is a wide range of unsecured loan lenders on the market, each with different lending criteria and offering different interest rates. Loans unsecured on property are equally available to people who aren’t homeowners, as well as those that are.
The interest charged on your loan will depend on the amount you borrow (with larger amounts generally attracting a lower rate of interest), on the term of the loan and on your personal circumstances. If you have a good credit history you are likely to be eligible for the best unsecured loans and headline rates offered by providers, as they need surety that you will meet your repayments.
Otherwise unsecured loans can be a risky investment for loan providers, with no security in place to reclaim their funds if repayments aren’t met. Unsecured loans for bad credit do exist, albeit often attached to a much higher interest rate. If you have a poor credit history, simply filter results by those that accept applicants with bad credit, before you compare bad credit unsecured loans.
There are two main categories of unsecured loans:
Fixed personal loans
Fixed loans are the most common type of personal unsecured loans: the loan amount and total interest payable is divided evenly over the loan term. This is a practical option as it enables you to plan realistically how much you can afford to pay back each month, and borrow accordingly.
Fixed interest rates mean your monthly repayments remain the same whether interest rates decrease or increase nationally.
Tools and tips
When comparing fixed unsecured loans online it is advisable to use the repayment calculator supplied by each loan provider to work out the likely monthly repayments for the amount you want to borrow.
You should bear in mind that these are only estimates based on companies’ typical APR; your repayments may be slightly higher depending on the interest rate offered and the size of your loan, with small unsecured loans sometimes attracting higher rates.
You should also compare cheap unsecured loans online based on whether they offer any repayment holidays during the term of the loan, or whether they impose any charges for early repayment if you feel either is likely to prove useful.
Flexible loans are less common and are offered by fewer unsecured loan providers; they come in one of two formats.
They either allow you to specify a maximum borrowing amount but don’t require you to take all of the funds at once. Instead you only withdraw the amount that you need, and only pay interest on this amount. These types of loans are useful for long term, variable projects such as building work.
More commonly flexible unsecured loans will lend you a fixed amount upfront then give you the option to repay your borrowing early or make overpayments as you see fit, sometimes without penalty.
Flexible loans often stipulate a minimum amount to be repaid each month but accept greater repayments without charge. However, flexible loans usually charge higher interest rates.
Some unsecured loan providers offer optional payment protection insurance with their loans, designed to meet the loan repayments on your behalf if you are unable to due to sickness or unemployment. These plans have been mis-sold in the past, so you should consider all of your options carefully.
PPI comes at an additional cost but can be worthwhile – i.e. to provide you with peace of mind when borrowing larger amounts. However, it is important to ask yourself, Do You Really Need Payment Protection Insurance?
How to get the cheapest unsecured loans
By comparing the monthly repayments, additional features and charges offered by different unsecured loan providers you can find the best unsecured personal loan for your finances.
Make sure you prioritise your needs: cheap interest rates are important but you may decide that repayment holidays or other clauses are worth paying a little extra for, depending on your circumstances.
Some unsecured loans UK consumers can choose from are offered through an unsecured loan broker, with others offered online – so you should make sure you are happy with how you will need to arrange and manage the loan, before taking it out.
By taking into account all of these factors, you should be able to borrow the amount you require and repay it over a period of your choice, in repayments that fit with your lifestyle even if you have a history of poor credit.
If you have a bad credit history, for example, you may be able to get an unsecured loan by nominating a homeowner guarantor. However, those with a very poor credit history who have been refused unsecured borrowing may find that a secured loan comparison gives them more options for borrowing.