Whether you are looking for some spare money to make home improvements or maybe you need to fix your car, an unsecured personal loan can come in handy for many different reasons.
In the UK, numerous loan options may be available to residents for a variety of reasons, including longer-term and shorter-term loans.
Understanding what an unsecured personal loan is, how it works, and what you may be able to use them for can help you choose a loan option that will work for your financial needs.
How Do Unsecured Personal Loans Work?
An unsecured personal loan is a loan that requires no collateral. In other words, it is a loan that can be taken out without pledging any assets as collateral or ‘security’ for the loan.
In contrast, a secured loan is one that requires collateral, such as a house or car. If you are unable to repay the loan, these assets may be repossessed by the lender.
Applying for an unsecured personal loan can be straightforward, and you can apply through a lender, such as a bank. You can also apply online from a loan connection service. Some online lenders may offer varying loan amounts, ranging between £500 and £1,000, depending on your eligibility.
Lenders in the UK will run a credit check before deciding whether or not to fund the amount of money you asked to borrow. You will then pay the loan back in fixed monthly instalments, alongside any interest, which is agreed with the lender in advance.
What Can I Use a Loan For?
Unsecured personal loans can be used for personal expenses and debts. Typically, unsecured loans are used for financial emergencies and when you have no other alternatives. However, some lenders will have restrictions over what you can borrow the money for, such as business expenses or debt consolidation purposes.
In addition, you may be able to apply for an unsecured personal loan if you have bad credit. But you should always remember that if you have a bad credit rating, you will be less likely to be approved for a loan of any kind.
It is advised that you do not use any short-term or unsecured loan option for ongoing debts. Using short-term loans to cover long-term financial problems may lead you into more debt .
Types of Unsecured Loans
Much like other short-term finance and credit options, unsecured products may allow you to borrow small and large sums of money. Depending on the lender, you may be able to request up to £1,000. Being aware of which types of loan products are available could help you decide what type of loan is best for your circumstances if any.
Personal Loans
Personal loans are typically used for personal expenses and financial commitments. These loans are often unsecured; however, they can also be taken out as secured loans depending whether you would like to use collateral.
Unsecured personal loans are typically used for emergencies like car repairs, home maintenance, or medical expenses.
Lenders typically require background checks for personal loans, and they are funded in smaller amounts than traditional loans. Some lenders may require repayment in a lump sum within two weeks, whereas others may allow you to make monthly instalments over a longer period.
Payday Loan
In most cases, a payday loan can be used to cover various expenses, such as bills or repairs. However, payday loans typically offer smaller loan amounts and shorter repayment terms. If approved, you will be required to pay the loan plus interest in a lump sum on your next payday.
Credit Cards
Unlike personal or payday loans, credit cards are a type of loan in which you are not given a fixed amount of money but have a maximum spending cap, or ‘credit limit.’
Credit cards can be paid in monthly instalments over a longer period of time. Credit cards can be paid back at any given time; however, if you fail to pay them back over a period of time, interest will accumulate.
What Can I Use an Unsecured Loan For?
If you have found yourself experiencing financial difficulty that you don’t have the savings for, an unsecured loan might be able to help. Unsecured loans are typically used for short-term payments and debts, such as any unexpected costs and bills like a broken car or emergency travel costs.
Buying or Fixing a Car
Many UK residents rely on their cars to get to work, and unplanned car repairs can present major problems. In some cases, you may not have the money set aside to fix your car or, even worse, purchase a new car. An unsecured loan in such circumstances can give you peace of mind that everyday life doesn’t need to be put on pause.
Travel Costs
While unsecured personal loans should not be used for any long-term travel costs, such as commuting to work or for luxury holidays, they can be used for travel costs you have incurred due to an emergency, such as visiting an ill relative overseas.
Unsecured personal loans may be a good way to help you when life throws unexpected curveballs your way. If you are eligible, some lenders may offer you between £100 and £2,500.
Home Repairs
If you are a homeowner, then you will be aware of how owning a home is an ongoing responsibility. These include taking care of your mortgage and fixing repairs along the way. Whatever the reason, big or small, an unsecured personal loan could help.
For example, if you’re having heating problems in the winter but don’t have the funds to make the repairs, an unsecured loan can help you out.
Do I Qualify For an Unsecured Loan?
Having read about many examples of what unsecured personal loans are used for, you may now be wondering: how can I qualify for one?
To qualify for an unsecured loan in the UK, you must typically meet the lender’s eligibility criteria which will include requirements like:
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Personal information
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Age verification
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Resident information
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Bank information
Is an Unsecured Loan a Good Idea?
By now, you should have a broad idea of what an unsecured loan is, how it works, and what you can use it for.
If you are still wondering whether an unsecured loan is a good idea, we have compiled a short list of pros and cons.
Advantages of Unsecured Loans:
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Repayments are fixed monthly, meaning you can budget accordingly
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No risk of losing collateral
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Easy application process
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If approved, you may receive the funds in as little as one business day
Disadvantages of Unsecured Loans
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Higher interest rates than other loans
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Lower loan amount compared to other loans
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Eligibility criteria need to be met
Before requesting an unsecured loan, it is important to check that you can afford to repay the loan. If you experience any difficulty repaying your loan, you can contact your lender for further help.
