How to Get an Unsecured Loan
What is an Unsecured Loan?
Unsecured loans offer a way of borrowing between £1,000 and £25,000 over a period of one to seven years. You make the same repayments every month. Unlike a mortgage, or homeowner loan, your home is not used to guarantee payments. The interest rate on an unsecured loan is normally fixed, meaning you know exactly what you’ll repay. For example, if you borrow £5,000 at an interest rate of 6.9% over three years, the monthly repayments would be £153.68.
Credit Card or Loan?
If you need to buy something for £1,000 or less, a credit card offering 0% interest on purchases is usually a better option. If you can definitely make the purchase on a credit card, and repay the debt before the 0% deal ends, consider applying for a best-buy credit card instead. Another advantage of buying on a credit card is that you get extra protection if the goods are not delivered or not as described. See our guide to Section 75 of the Consumer Credit Actfor more information. But, if you are buying something that costs more than your credit card limit, such as a new car or house extension, unsecured loans are the best option.
Crush Existing Interest Rates
If you already have several loans and credit cards, you could use a new loan to consolidate your debts. This means repaying your existing debts with the loan at a lower interest rate, reducing your monthly repayments and the amount of interest paid overall. However, be aware that many loans have penalties if you repay them early. Doing the sums to work out if debt consolidation is worthwhile can also be complicated. Contact a free debt charity such as National Debtline for advice first.
Can I Afford It?
TotallyMoney.com’s personalised credit comparison tool allows you to compare different loan amounts, as well as different repayment periods, to reveal the difference in monthly payments. This should help you to decide how much you can afford to borrow, and over what period of time. You should also consider how your circumstances and budget may have changed in three or five years time – will you still be able to afford the repayments?
What Interest Rate Will I Pay?
The interest rate you are offered on an unsecured loan will depend on your credit history. It may not be the interest rate advertised by the bank or building society. Only 51% of successful applicants are offered the ‘representative’ APR. The rest will be offered a higher interest rate, and others will simply be rejected. You normally don’t know what interest rate you will be offered until you apply for the loan. And applying for lots of loans can damage your credit rating, because banks don’t like to see that you’ve been rejected several times. The good news is that TotallyMoney.com’s comparison service will tell you if you’re likely to be accepted for a loan BEFORE applying. It carries out a ‘soft search’ of your credit data that will NOT leave a mark on your credit file. Our advanced credit matching technology then compares a wide selection of loan providers to give you a broad choice. This means you can only apply for loans that you know you’re likely to get. It’s much more important to apply for a loan that is affordable and realistic than to simply chase the lowest-possible interest rate.
Is My Credit File Squeaky Clean?
If you have a good credit history, meaning you have always repaid your credit cards and loans on time in the past six years, you stand a better chance of being accepted for a loan and getting a low interest rate. But if you have missed credit repayments in the past, you may have a poor credit history which makes it unlikely you’ll be accepted for a new loan. In this case, you should check out our bad credit loans guide. It is important to check your credit file BEFORE applying for a loan. You should ensure that all information is accurate and up-to-date. Read our credit rating guidefor more information.
Unsecured loans can be a great option for some people:
- You can borrow large chunks of cash.
- Your home is not at risk if you get into financial difficulty.
- The interest rate is usually fixed.
But the disadvantages include:
- You are often charged a penalty if you want to repay the loan early.
- Set monthly repayments can be inflexible.
- Interest rates can be high, depending on your credit score.