It’s an unfortunate fact of life that at some point in time, most of us will hit a difficult period financially. It’s suggested that over 11.5 million people in the UK alone have less than £100 in savings, with 20.3 million adults in the UK not having confidence in their ability to manage their money. For this reason, the personal loans industry has grown over the past few years, with more and more options available to those of us facing financial emergencies.
From £4.5 billion lent back in April 1993, to the 17.17 billion recorded in October 2018, the UK has one of the most active lending industries around. This is making the process of gaining personal loans now a much simpler and more widely available one within the finance industry, but are they trustworthy? With updated regulation and changing financial requirements, unsecured personal loans are a much more viable option in today’s society – here’s what you need to know if you’re looking to apply.
What Are Personal Loans?
According to the Money Advice Service, Personal Loans are ‘loans that a bank or other lender makes that are not secured against any asset such as your home’. When you apply for these loans, you are asking for money but unlike a mortgage or car finance, this loan isn’t secured against any asset. This means you can apply for financial help without having to use your home, car or other valuable assets as collateral in the case that you can’t make a payment for any reason.
In most cases, people use personal loans in emergency situations to cover medical expenses, educational needs, or to repair or purchase major household appliances. They are repaid over a fixed period of time in fixed price instalments, unlike credit cars where you can often pay back as much as you want per month providing you reach the minimum required amount.
Personal loans can also be used to consolidate debt, as they typically have lower interest rates than standard credit cards or high-interest loans, so can be used to bring it all together into one payment every month. If you happen to be in Singapore, and are looking for a personal loan option, you can consider getting one here: https://qvcredit.sg/personal-loan-singapore/.
What Are Unsecured Loans?
The term ‘unsecured loans’ is generally interchangeable with ‘personal loans’ – they are considered to be the same thing. Unsecured personal loans don’t require asset securities but could lead to a County Court Judgement (CCJ) if left unpaid.
Unsecured vs. Secured Personal Loans
When determining the loan you need to help you through a difficult financial time, you’ll face two different terms – secured, and unsecured. As mentioned before, unsecured loans don’t require a security and on the same thread, secured loans do require a security.
If you are hoping to take out a larger amount of money, you may only be able to do so through a secured loan. Mortgages, for example, are a form of secured loan in which your home becomes collateral in the case that you can’t make a repayment. It offers security to the lender and therefore reduces interest rates but does mean that you could have the asset repossessed if payment isn’t made for any reason. After the loan is repaid in full, you will regain full control and ownership of the asset again but will be unable to sell the asset in the time it’s secured against the loan.
Can I Get An Unsecured Loan?
Every lender you come across is likely to have different criteria for who they are willing to lend to, however, there are a number of details that are standard across the industry under UK law and FCA regulation. All trusted and trustworthy lenders will only accept your application if you meet the following criteria:
- You Are A UK Resident – You need to be a registered resident of the UK. You should ideally be on the electoral register, but some lenders may require proof of address if you’ve just moved or the address doesn’t match to the electoral register for any reason.
- You Are Employed – Without employment, you will not appear trustworthy to lenders simply because you aren’t considered to have a regular income. Those who are part-time employees, self-employed or on benefits (in some cases) may still be accepted for a loan, but this is at the lender’s discretion.
- You Are Over 18 – By UK law, personal loan lenders are unable to lend to anyone under the age of 18
You should also be aware that many lenders will only lend to you if you have a fair or good credit history. They want confidence in the fact they will have their loan repaid, but it is also within FCA regulation that they can only lend to people who can afford the loans they are applying for. Many lenders do this by conducting credit and affordability checks as standard.
What Are The Benefits?
Unsecured loans have a number of benefits for those in rough financial situations, providing they are applied for and managed effectively. From interest rates to repayment periods and the amount you can borrow, unsecured loans may suit those wanting smaller amounts of money over a short amount of time, or who don’t have any assets that could be used as collateral.
Some of the benefits of unsecured loans to consider are:
- You can often borrow larger amounts than with a credit card
- Your repayments will be fixed amounts, making budgeting easier
- Interest rates are usually fixed and predictable
- You can pick the length of the loan (in most cases)
- You’ll usually get lower interest rates than on a credit card
- You can consolidate credit and loans into one core payment. This could reduce costs by taking away high interest rates from other loans.
You can still pay off personal loans early if you have access to the money you need to do so, but some lenders may charge you if you pay off more than £8,000 at one time.
Is There Anything I Need To Be Careful Of?
While personal loans could be a useful solution to financial emergencies, they do have risks that you need to be aware of in order to prepare in some cases. Perhaps the most prominent is the issue of interest rates. While not every lender will charge high interest rates, APR does tend to be higher than with secured loans or other credit forms. This can still work out to be less depending on the length of your loan. Shorter loans might still have a high APR, but if they only last for three months, you won’t likely be charged the full APR by the end of the loan. If the lender is trying to do so, this could be cause for concern and you should seek debt advice immediately.
In some cases, you may also find that lenders won’t lend less than £1,000 or agree to periods of less than 12 months. There are lenders available to suit your needs, however, so utilising a comparison site is often a good place to start.
You should also be aware of the risks associated with defaulting on a payment. With secured loans, you will lose your asset, but for unsecured loans, you are more likely to face legal action in the form of a CCJ. A CCJ will remain on your credit report for years to come, but even just missing a payment can negatively affect your credit score and potentially make it more difficult to get other credit and loan-related products in the future.
Getting The Best Value From Your Personal Loan
If you come to take out an unsecured personal loan, you’ll need to take a few steps to get the best deal for you and your business. From working out how much you need, to shopping around rather than just opting for your bank, to get the best deal, you should:
1. Work Out How Much You Need To Borrow
When it comes to applying for a loan, the crucial first step is to work out how much you actually need. It’s easy to fall into the trap of borrowing too much, and so determining how much you want can ensure that you not only keep to an affordable amount but that you can more effectively compare lenders and how much they’re looking to charge you to borrow the same amount.
2. Don’t Just Go To Your Bank
While the familiarity of approaching your existing bank for a loan can be alluring, it could be more beneficial to shop around for better deals. There are plenty of lenders around that offer new customers specific deals that you may not be able to get with your bank or a lender you’ve approached before, so it’s important to take a look around at what’s available.
3. Utilise Comparison Sites
Following on from the point above, personal loans brokers or comparison sites can give you insights into lenders you may never have come across manually who are equally as trustworthy as the industry’s biggest names. You should always find the top loan offers for your chosen amount and then compare the costs, rates, requirements and more. Representative rates aren’t always immediately obvious, and so using a comparison site that uses one form to match you to the best lenders could be a more beneficial and fruitful way of getting the best deals.
4. Calculate A Quote Before You Apply
Whether you’re comparing, or you’ve found a lender you want to use, you should always calculate a quote before you apply for a personal loan. When a lender runs a credit check on you to determine your eligibility for a loan, it leaves a mark on your credit report. Too many checks from lenders can actually have an adverse effect, so it’s best to get quotes before you hit that apply button. You can compare and contrast pricing, without leaving a mark on your score.
5. Consider Peer-To-Peer Loans
Peer-to-peer loans refer to any loan provided by your peers, whether that’s family, friends or via a website that links you to people who have money to lend. While this isn’t the solution for everyone, it could offer a more relaxed form of borrowing and lending with potentially lower interest rates. You should always take care with these loans, however, as they are not always protected by financial regulation to the same extent as traditional lenders.
Will An Unsecured Personal Loan Affect My Credit Score?
As with any form of loan or credit, your credit score can be affected depending on how you handle and manage it. Personal loans, when repaid in the agreed instalments on time and in full, you could have a more positive effect on your credit score, even offering a level of healing to one that might have previously been on the poorer side. However, a missed or late repayment can have the opposite effect. While it won’t have as harsh of an effect as a credit card immediately, it can begin to reduce the score when repayments are missed.
When used as debt consolidation, personal loans can be used to prevent harm to your credit score by paying off harmful loans or credit and consolidating it all into a single payment. With lower interest rates than standard credit or payday loans, personal loans offer better management and more affordable repayments that could work to improve credit scores, rather than harm them.
Unsecured personal loans are a solution worth considering if you find yourself struggling in a financial emergency. Whether you want to consolidate harmful debts into one healthier payment, or you’re in need of home repairs, medical bills or money for another emergency bill, these loans offer a trustworthy way to cover the costs. They are typically shorter term, meaning you won’t have debt hanging over your head and with an asset-free lending experience, you won’t be at risk of losing your home, car or other valued property. Hopefully, this guide has helped you get started with applying for personal loans, from the initial search to ensuring you’re getting the best deal.