Unsecured loans

Smaller loans which are not secured against your property

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Hitachi Personal Finance

Guide to unsecured loans

  • What is an unsecured loan?

    An unsecured loan is essentially a loan for a one-off essential purchase. As these loans are usually for smaller amounts, lenders won’t require you to secure the loan against your home, however your credit rating will be taken into consideration and may determine the amount of money you are able to borrow.

    They are known as unsecured loans to distinguish them from secured loans, or homeowner loans, in which the money you borrow is secured against your home.

    Unsecured loans are often known as personal loans as they are a good option when you need extra money for small purchases and changes in your life, however it can be hard to find the right deal for you. Read on to learn about some of the benefits of unsecured loans and what other options are available to you.

  • Pros and cons of an unsecured loan

    An unsecured loan might enable you to borrow more than you can with a credit card, and the interest rate is often fixed (but not always) making it easier to keep track of your finances.

    An unsecured loan can also be used as a debt consolidation loan – used to pay off multiple debts so you can simplify your finances by only making one payment each month.

    However unsecured loans can also have higher interest rates than you might be offered by secured loans, and some even come with early repayment charges, which can be a pain if you are suddenly in a position to pay back the money you borrowed. To make sure you are finding the cheapest unsecured loan you should decide exactly how much money you need (never borrow an excessive amount just because it is available to you) and then compare the interest rates offered by different types of loan for that amount.

    You should also be aware that lenders will look at your credit history when deciding on how much you can borrow and at what rate. If you have a bad credit rating you might find it harder to find a sizeable unsecured loan at a good rate.

  • Alternatives to unsecured loans

    When considering taking out a loan it is always worth taking a minute to look at the other options available and to think about what it is you are borrowing the money for. If you need money to buy a car then a car finance loan might be a good option.

    Alternatively, if you are looking to borrow a less than £3,000 a credit card might actually offer lower interest rates. The longest 0% purchase card offer is 27 months, which means if you wish to borrow less than £3,000 and are confident that you can repay all the money within 27 months then this might be a good option for you.

    Maybe you are hoping to pay off multiple debtors at once to simplify your finances? In this case a debt consolidation loan could help you.

  • Things to remember

    Having a bad credit rating can limit the amount you are able to borrow with an unsecured loan. If you have poor credit history there are other ways to borrow money though. Certain credit cards accept people with bad credit ratings, and you can use our comparison tool to see which of these are most likely to accept you.

    While you might not be able to secure as much money with a small unsecured loan as you might with a secured or homeowner loan (because the latter is taken out against your house), it is certainly a less risky option. However this doesn’t mean an unsecured loan is completely without risk. If you fail to keep up with your repayments you could be taken to court and, if you receive a County Court Judgement (CCJ) against you, this will have a serious impact on your credit rating and make it extremely hard to find the cheapest unsecured loans in future.

    As with taking out any loan or credit card, you need to be sure that you have budgeted so you can make the repayments each month. You should also be aware that the longer it takes to pay back the loan in full, the more interest you will be paying, making the loan ever more expensive.