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Introduction To Unsecured Loans

An unsecured personal loan is a loan that you can take out without offering your lender any form of security. It differs from a bank overdraft or credit card in that it allows you to borrow a fixed amount of money over a fixed period of time, usually at a fixed interest rate. It therefore enables you to calculate your loan repayments from the outset, making it easier for you to manage your household budget.

Applying for an unsecured loan

When you apply for an unsecured loan, your chosen provider will use an approved credit reference agency to make a search against your name and address. Following performing a search, your lender will be able to determine whether or not you have a history of good financial management. If you have always practiced careful money management, and have never failed to meet the cost of your monthly loan repayments, you should have a favourable credit rating. This means that a lender will consider you a low risk customer and as a result, will be more likely to provide you with an unsecured loan. If, on the other hand, you have a history of running up large debts, a lender may consider you a high-risk customer and as a result, may refuse to lend money to you.

Calculating the cost of an unsecured loan

A wide range of unsecured personal loans are on offer, which means that it is essential for you to research your options with care. The main criteria to look out for when searching for unsecured loans is the annual percentage rate (APR). The APR is an interest rate that includes all the fees and charges you will need to pay when you agree to take out a loan. In general, the higher the APR on your chosen loan, the more you will pay your lender in interest over the course of your loan.

While it pays to pay attention to the APR, it is important to realize that you could end up paying more or less than the advertised rate. If you have a poor credit rating, your lender may charge you a higher interest rate. Interest rates on unsecured loans vary considerably between lenders, but generally speaking, the larger your loan amount, the lower the interest rate you will incur. This should hold true whether you have a favourable or unfavourable credit rating.

Defaulting on an unsecured loan

If you fail to meet the cost of your loan repayments, you could find yourself in default. When you default on your loan, your lender will take steps to contact you to remind you of your financial obligations. Eventually, your lender may take you to court in an attempt to collect the money from you. If, despite your best efforts, you fail to repay the money you owe them, your lender will inform a credit reference agency, which will put a black mark against your credit rating, making it harder for you to obtain other unsecured loans in the near future.