When to take out an unsecured loan
In times of economic uncertainty, many consumers opt to put their home up as collateral in order to get a good deal on a secured loan - but unsecured borrowing can often be a favourable alternative.
Because these kind of loans are not secured against your assets, lenders are taking on more risk and this fact will be reflected in the cost of the loan.
Unsecured loans are typically between £1,000 and £25,000 and the amount repaid is subject to an interest rate known as Annual Percentage Rate (APR). Comparing the amount of interest on your repayments is therefore the easiest way of working out how competitive a loan is, but before you start shopping around for deals there are numerous other considerations to bear in mind.
People with bad credit ratings should be the first to consider whether taking out a new loan is absolutely necessary. Even if such individuals are accepted by a lender, the APR will invariably factor in the borrower's previous indiscretions.
That ultimately means people with poor credit ratings are unlikely to find the best deal in the unsecured loans market, and will typically have to venture further into the secured loan market in order to show lenders they're serious about meeting repayments. Perhaps somewhat unfairly, this is also true for people who have changed address a number of times in recent years as well as the self-employed.
If you don't fall into one of those categories, however, taking out an unsecured loan could still be the best course of action.
While you're never going to get the cheapest APR with an unsecured loan, you can benefit from greater flexibility in your borrowing. Naturally the main appeal is that there is no need to put your home at risk - an obvious advantage for anyone with sizable assets - but these kinds of loans also entail the more immediate plus-sides of being relatively quick to approve and having minimally intrusive background checks.
And yet in spite of their convenience, there are a number of caveats that should be voiced before you sign on the dotted line.
Perhaps the most obvious pitfall is to take the 'typical' APR at face value without checking the small print. In reality, typical APRs only apply to the most desirable customers and about a third of all borrowers end up paying a higher rate. Another potential source of confusion is the self-explanatory but easily-missed distinction between fixed and variable interest rates, with the latter being pegged to the Bank of England's base rate of borrowing.
The next thing to check is that you shop around for the best deal even amongst an individual lender. Something many consumers fail to realise is that financial institutions will typically offer different rates depending on which medium you apply for the loan, so taking out a loan over the phone could actually cost you more than simply clicking onto the bank's website.
Finally, a number of lenders impose so-called 'early settlement charges', also known as redemption penalties, which are intended to discourage debts being paid off too quickly. If you envisage being able to pay off your loan early, therefore, be sure to go with a lender who doesn't levy such a fee.
