What are Unsecured Loans?

Most loans for 'smaller amounts' are unsecured. This means that the borrowers have not provided any security for their loans and are not risking their homes or other assets if they default on payments. (But they will risk losing their credit rating - or more - if they default.) Unsecured loans are generally made by lenders on the basis of the credit scores and / or credit references on you, their prospective customers.

Depending on your creditworthiness you can borrow from about £500 to substantial amounts from 6 months to 5 or more years. If you decide to repay the loan before the end of the term most lenders will make a penalty charge.

You usually have to make regular monthly payments of fixed amounts to pay off unsecured loans. This means that you will know exactly when your loan would be fully repaid, unlike bank overdrafts and credit cards where you can make payments of irregular amounts or make minimum payments to clear your loan over an indeterminate period. If regular payments suit you, then depending on the APR, the amount and term of the loan, unsecured loans can be a better way of borrowing compared with credit cards and overdrafts.

So the main benefit of this type of loan is that you can borrow a fairly large amount over a short to medium term on a fixed repayment schedule without risking your property. And you can shop around on the Internet because many lenders now do online quotations. This is probably the fastest way of finding out what the key terms for the loan will be.

The APR of the loan provides you with a standard means of comparing the loan from different lenders and is calculated from the interest rate, the term and frequency of payment, the cost of arranging the loan and other charges. The APR is the best way of comparing the loan amount from different lenders.

Other points to bear in mind with unsecured loans are arrangement fees (if any), restrictions on the use of the loan (if any), payment protection plans (shop around if possible, and ensure the plan meets your needs) and penalties for repaying the loan before the term (usually there is a charge if you pay off the unsecured loan before the end of the agreed lending period).