Unsecured loans do not require you to use your assets as security in case of you defaulting. The interest rates on these types of loans tend to be higher than that of secured loans, since the lender is taking on more risk. Unsecured loans tend to be flexible in that loan providers don’t place restrictions on what you can and cannot do with the money. You can use the cash for a holiday, for repairs, or for anything else you choose.
Many people opt for an unsecured personal loan to help them consolidate debt, since the rate on loans is usually significantly lower than that of credit cards which can charge upwards of 18% interest. By consolidating all your smaller debts into one unsecured personal loan, you could reduce your outgoings, and it should help you to stay on track with your finances.
When considering taking out an unsecured loan – make use of comparison sites, since they can help you quickly compare the various merits of loans and lenders. And, make use of online loan calculators to help you work out how much you can afford to borrow.
Fixed rate of variable?
There are two main types of loan, fixed rate and variable rate. Fixed rate loans offer the convenience of knowing exactly how much you are paying back each month throughout the term of the loan, which helps you to budget. Variable rate loans depend on market forces and the rate set by the Reserve Bank, meaning your repayments can go up as well as down. If rates go up you could end up paying back a lot more than you originally planned for, and high variable rates have caught many out leaving them unable to meet repayments.
Check out fees and charges when selecting an unsecured loan
Take into consideration any arrangement fees when you’re deciding on a loan, as well as whether lenders charge you a fee for the transferral of funds. When you’re selecting which unsecured loan is right for you, check out whether there are any early redemption charges. Find out if your prospective lender offers any options for a ‘repayment holiday’, since this could help you out of a tight corner, but bear in mind that interest will be charged if you miss payments – meaning you will ultimately have more to repay.
Also find out what happens in the event you fall ill or become redundant. You may want to take out a form of insurance to cover yourself in the event of any disasters, and while PPI (Payment protection insurance) may not have the best name, it can provide a useful form of protection.
Why an unsecured loan may not be for you
If you want to borrow a larger amount of money, an unsecured loan may not be the right way forward. If you have equity in your home you can generally borrow larger sums of money at better rates, and over longer periods of time. Secured loans offer benefits, but come with a warning – that you need to keep up repayments or your home could be at risk.