What to Consider When Applying for an Unsecured Personal Loan

March 10, 2015

Unsecured personal loans are generally taken out for one-off purchases such as a car or a special holiday. The attraction of this type of loan is the fixed interest rate and fixed terms offered, as borrowers can budget accurately and retain better control of their finances.

Although on the face of it, an unsecured personal loan seems like a suitable alternative to credit card debt, interest rates vary considerably between lenders. They are not always a good option especially if you already have other borrowing.

One major advantage of an unsecured loan as opposed to one secured on an asset, however, is that your home will not be at risk of repossession should you default on payment.

Unsecured loan amounts generally fall between £1,000 and £25,000, and are offered by most banks and building societies. More recently, peer-to-peer lending has become popular with borrowers, but it is important to know that this sort of lending is unregulated in the financial industry.

A few considerations before applying for an unsecured personal loan

Do you have a poor credit rating?
Every lender will check your credit history for signs of missed payments, County Court Judgements, or any form of insolvency procedure. If you have undergone formal insolvency during the last six years, it will show up on your credit file and influence the lender’s decision. The interest rate offered could be higher than usual under these circumstances, if your application is passed. Not being on the Electoral Register will also adversely influence a lender’s decision.

Your current financial status
How much borrowing have you already taken out? Are you getting behind with payments, or are you likely to in the near future? Should you be unable to meet the repayments of even a small unsecured personal loan, it could result in formal insolvency proceedings. If the intended purchase is not urgent, it may be better to wait until other debts have been paid off before applying.

Don’t borrow too much
You may find that a lower interest rate is offered if you borrow more money, but unless you need the extra this can be risky. If you’re unable to make repayments later on, the increased borrowing will make the situation worse.

Do you need a bad credit loan?
Unsecured personal loans can help to improve your credit rating if it is poor, but only if payments are made on time and in full throughout the term. A bad credit loan is similar to a personal loan in that interest rates are fixed, albeit at a higher rate because of the risk you present to the lender. Some people take out a bad credit unsecured loan to consolidate their debts, but this should only be done under the guidance of a professional advisor.

Would a secured personal loan be better?
Securing a loan against an asset needs careful consideration. If the asset is your home and you do not keep up repayments, it could be repossessed. Some people can only get a secured loan because of previous debt problems, but it is always a good idea to seek the guidance of a professional money expert before going ahead with a loan such as this.

Characteristics of UK unsecured personal loans

Flexible payments
Some lenders offer personal loans with flexible payments. These are termed payment holidays, payment breaks or deferred repayments, and mean that you can apply to miss one or two month’s payments a year.

This appears to be a useful feature, especially if you suddenly experience short-term financial problems, but in the long-term flexible payments can be the cause of later default due to the amount of interest that mounts up during the payment break. They extend the term of the loan and increase the overall amount of interest paid.

Overpayment options
On the other side of the coin, some lenders allow a number of overpayments to be made. In the long term, overpaying by even a small amount can significantly reduce the overall interest.

Impact on your credit file
Lenders can make a ‘quotation search’ on your credit file before you apply, which does not leave a trace. If a lender turns you down after formally applying, this is when it adversely affects your credit rating.

It’s important to check your credit file carefully before considering an unsecured personal loan. Three credit reference agencies exist in the UK – Experian, Equifax and CallCredit – and it’s worthwhile checking all three agencies as details held sometimes vary.

John Baird

Insolvency Adviser

Tel: 0800 063 9250

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