What are unsecured loans?
When you are looking for a personal loan that best suits your circumstances it's important to shop around and be certain about the type of loan you would like to take out. Loans can be unsecured or secured, and knowing what taking out an unsecured loan involves should be an important part of your research. They are different to secured loans, where the amount lent is usually, but not always, only available to homeowners where the loan is backed by using the property's equity.
Why do people use unsecured loans?
If you don't have a significant asset on which a loan can be secured, then unsecured loans are an option you can explore. Before pursuing an unsecured personal loan, it could be worth doing an online credit check to make sure your credit score would qualify you for a loan. Lenders are usually willing to consider unsecured loans, but are likely to ask for evidence that you will be able to repay the money loaned to the term agreed between you.
What are the main features of unsecured loans?
The major difference between an unsecured and a secured loan is the interest rate you are likely to be charged, generally considerably higher than if you have an asset to secure the loan. They are very useful if you don't want to borrow a large amount of money but want several thousand dollars for a car, for example, good quality domestic machines or even to take a special holiday. As with any loan you need to be conscious of your ability to pay it back and so need to factor in whether you will go for a fixed or variable interest rate. Unsecured loans in general will have a shorter time period for repayment. Up to five years is usual, it can be less, but you need to look carefully at how much interest you will be charged.
What are the pros and cons of unsecured loans?
They can be an easy and relatively cheap way for you to get the money you want, and you may find deals that offer you a payment holiday for a few months when the agreement begins. Check that you won't be paying extra interest when repayments kick in. Unsecured loans also give you flexibility in terms of how long you have to settle the debt, with three to five years likely to give you a lower interest rate. Shorter terms will probably increase the amount of interest you'll pay.
Whatever you decide to do when taking out a personal loan do your financial homework so you know you can pay the loan back. If the loan is unsecured you won't be liable to lose any assets but you could, if you default, be taken to court for the sum owed and experience difficulties in future for getting a mortgage or loans, such as credit cards.