An unsecured personal loan is a type of loan that doesn’t require you to provide any collateral. That means you can borrow a loan even if you do not possess an asset such as a home. It can be used for a variety of purposes. From using the funds to cover the expenses of your wedding to pay for your car repair – an unsecured loan is one of the most popular ways of financing. Generally, lenders offer personal loans from £1,000 to £50,000. You can borrow an amount within the range specified by the lender. However, these loans are known for their high rates of interest.
Let’s take a deeper look at it to understand its overall mechanism.
Are Unsecured Loans a Good Idea?
Borrowing an unsecured personal loan is not a bad idea always as there are a lot of good reasons to borrow them. It can be a smart option if you commit to paying back on time. If you have a financial crunch and you are wondering whether an unsecured personal loan can be of any help, then consider the following things before making your decision:
- You should have a regular and stable income to repay the debt each month.
- The loan amount that you borrow must be affordable by you to repay.
- When you have exhausted all other alternatives to borrowing money.
- If you have multiple debts and you want to merge them into one for easier and convenient budgeting methods.
However, there are times when a personal loan may not prove to be a good option. How do you know when it is not right to borrow a personal loan? We will cover this in our next section.
When are Personal Loans not in your Favour?
The number of people applying for a personal loan is on the rise since the Great Recession. Due to the convenience, and flexibility in repayment it offers, people tend to look for such options during hard times. But remember that an option may not work for you in every situation. Here are a few signs that can help you understand that an unsecured personal loan doesn’t make any sense for you:
- If you do not have a regular income it may become difficult for you to manage the repayments on time and in full.
- Taking a personal loan for making extravagant and non-essential expenses may prove to be financially unhealthy. You can scale back your expectations a little and rather save up for such expenses.
- When a lender/credit broker offers you a “no credit check loan”. Every FCA authorised lender has to run a credit check before giving a loan to you. Beware of such scammers and report it immediately.
Do Unsecured Personal Loans Hurt Your Credit Score?
An unsecured personal loan can help you improve your credit score if you know how to manage the debt properly. Missing out on repayments or making late payments may damage your score. If you already have a bad credit score, then you must be extra careful about the repayment schedule that you follow. Make all the repayments on time and in full to help your score improve gradually.
What Happens if I Don’t Pay my Unsecured Loan?
When you miss paying your loan, you are charged with an additional fee by the lender. Also, a few points are knocked off from your score when you do not repay on time. It is an unsecured loan and none of your assets is at risk of being possessed by a lender. However, the lender does have the authority to issue a County Court Judgement (CCJ) if you continue missing the repayments. This is a legal notification and if you receive a notice, contact free debt advice service.
A personal loan can help you to manage unexpected expenses but borrow only if you have a repayment plan. Always borrow a loan that offers you a low-interest rate. Comparing several lenders and reviewing their loan quotes can be helpful for you to make an informed decision. Reputable lenders are now performing soft inquiry (credit check that does not impact your score) on your report in the initial stage. You will have to submit the loan application and give your consent for a hard credit check that will be conducted before the final approval by the lender.