Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
22nd February 2021
4 minute read
Planning something totally cosmic like a tour around the world or a huge hot tub in your garden?
If you’ve not got the cash stashed in your savings pot, you might be considering a personal loan. Or more specifically, for holidays, hot tubs and other such expenses, an unsecured loan.
For those of you who aren’t crystal clear on how you might get an unsecured loan, the Guru has all the information you need.
For other loans, see which personal loan is best for me.
What is an Unsecured Loan?
If you’ve got your eye on what they call a ‘big ticket purchase’ – something that costs more than you can comfortably squeeze out of your monthly salary – you could take out an unsecured loan.
Also known as ‘signature loans’, unsecured loans are granted depending on your credit rating, rather than you having to put up assets as guarantors. With an unsecured loan, you could borrow up to around £25,000 without needing to put an asset up as security.
Why choose an unsecured loan?
When you want to borrow amounts that are more than a credit card limit or perhaps want a better interest rate than the credit card you can get, an unsecured loan is a way to get your hands on a fixed sum.
Borrow when you need it and pay it back over a fixed time period, usually with a fixed interest rate to cover the fee for lending. This way you’ll know how much of your hard-earned cash you’ll need to lock down to pay it back each month.
You get the hot tub or plane tickets for your travel and repay your lender an affordable amount for an agreed length of time, usually between one and five years. The lender of your unsecured loan may be a bank, building society or even a peer-to-peer lending platform.
Of course, borrowing over a longer period means you will pay more interest on the initial sum. It’s always important to strike a good balance between how much you can afford to pay each month and how much you end up paying back in total.
If what you’re planning to buy doesn’t cost mega bucks and you know you can pay it back in a short time, finding a good credit card deal is another avenue you could explore. Find other alternatives to a personal loan here.
Compare Unsecured Loans
To give you a better chance of getting a loan that’s a great fit for you and your circumstances, it’s smart to compare the unsecured loans on offer. When you do, don’t forget that the representative APR (annual percentage rate of interest) advertised might not be offered to you.
Lenders need to show the rate typically given to 51% of applicants and if you are accepted for the loan, you could fall into the 49% who don’t qualify for that rate. In short, you could end up paying more than you expected for the privilege of borrowing. Factor in any early redemption and arrangement fees too as these could increase the overall cost of your borrowing significantly.
Size of Unsecured Loan v Interest Rate
The larger the unsecured loan, the lower the rate of interest tends to be, but before you start adding expensive hot tub extras onto your shopping list, you shouldn’t let this tempt you into taking out a bigger loan than you need.
However, there is one exception to this general rule. If the amount of money you want to borrow is on the cusp of another figure, it’s worth comparing the interest rates of both figures.
Say you’re looking to borrow £4,900, you may want to check deals for £5,000 too as the overall amount you pay back could drop because of a decrease in the interest rates. Worth a few more minutes of research to get you a better deal, right?
Compare unsecured loans here and let the Guru do the legwork for you.
- Supported by borrower’s credit rating
- Common types include loans for home improvements, holidays, weddings
- Supported by borrower's assets
- Common types include mortgages and car loans
In the unsecured loan v secured loan debate, much depends on your personal circumstances. Secured loans typically let you borrow longer term – between five and twenty years. On the plus side, they could give you lower interest rates or the option to pay back over a longer period. This is likely to mean lower monthly payments, though you could find you pay back more money overall.
However, there is a catch. Just like it says on the tin, a secured loan is anchored against an asset, most likely your home. This means that if you’re unable to meet your loan payments you’re at risk of losing it. There’s also the small fact that if you don’t have a property to offer up as capital, a secured loan may not be an option open to you.
Fixed v Variable Rates of Interest
The differences don’t stop there. While most unsecured loan rates are fixed, secured ones are usually variable; so, you could find the costs of monthly payments increase, causing your careful budgeting to go askew. For these reasons, secured loans are sometimes used when your credit worthiness has taken a hit and an unsecured loan isn’t an option.
If you’re not sure how credit worthy you are or you’ve been knocked back for a loan you expected to get, take the time to check your credit report. This will ensure there aren’t any errors holding you back rather than firing off multiple secured loan applications. And when you do apply, find out up front whether a lender will be doing a full credit check or a soft credit check.
Use our moneymatcher to seek out a loan and we’ll help you compare all the right deals for your situation.