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What is an Unsecured Personal Loan?

What is an unsecured personal loan? Well put quite simply, it’s whatever you want it to be, a personal loan can be used for anything you want.

Once you’ve negotiated the murky waters of choosing the best deal for you, you can spend the money on whatever you chose. The most common reasons for taking out a personal loan are home improvements, car purchases or debt consolidation, but people can and do take out personal loans for almost anything. Lloyds TSB released information on some of the more unusual reasons for a personal loan in March and these included a suit of armour, a dowry payment and a camel!

What are the advantages of an Unsecured Personal Loan?

More seriously however, an unsecured personal loan offers consumers a great deal of flexibility and not only in what they spend the money on. Since it’s not secured on your property both homeowners and tenants are eligible and unsecured loans can be arranged more speedily than a secured loan where you may have to wait to have your collateral approved. Personal loans are agreed at a set rate of interest, for a set period and a set amount. This means that there is no temptation to borrow more, as with a credit card, and you can budget effectively to manage the repayments.

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  • Switching loans can save money - It is all too easy for consumers to become complacent when it comes to finances, and loans are one example of this. Many people remain with the same lender or the same loan set-up simply because it's easy and familiar.

Providing you are borrowing enough to get a good rate of interest and have a reasonable credit record, an unsecured personal loan can be a very good way of raising cash.

What are the disadvantages of an Unsecured Personal Loan?

However just because a loan is not secured doesn’t mean you aren’t risking anything by taking one out. If you default on credit repayments of any kind, financial companies can take you to court to recover their money; in the worst case scenario this can lead to possessions, or even your home if the loan is big enough, being repossessed or sold to repay the debt. The best way to avoid this is by being sensible about whether you can afford repayments and keeping in contact with loan companies should problems arise; many companies would rather resolve disputes without resorting to legal action.

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Another thing to bear in mind is that in order to take advantage of the best deals available on unsecured personal loans you need to borrow over a certain amount. This varies between loan providers but if you only wish to borrow a small amount a credit card or overdraft may be a more economical method of finance.

How do I go about getting an Unsecured Personal Loan?

The loan market is expanding rapidly and nowadays it’s not only banks and building societies that offer personal loans. Supermarkets, the Post Office and Internet Finance companies all over competitive loans in addition to the more traditional high street banks and building societies. Most loan companies will offer their services via call centres and the Internet as well as in person so researching who has the best deal for you couldn’t be more convenient, although with so many different companies competing there’s a lot of comparison shopping to do!

It’s important to shop around before committing yourself, an unsecured personal loan is a big investment and you want to make sure you get the best deal. Additionally personal circumstances play a part in what kind of deal you get, expect to have the loan company run a credit check, if your circumstances aren’t ideal you may not get the best offer or have less companies willing to accept your application.

Other things to consider

While choosing whether an unsecured personal loan is good for you and which one to choose there are some important considerations. Different people want different things from their loan companies, there are all kinds of perks and loan penalties associated with different loan companies so consider what to expect from the deal. Things like repayment holidays, early repayment fees and payment protection insurance are all areas you should be familiar with and have a clear idea of what you want before choosing a deal that might not be right for you.

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  • Early Redemption Penalty – Am I Being Ripped Off?
    If you have taken out a loan and now decide to pay it back before the loan complettion date you may be forced to pay and early redemption penalty, normally around 2 months interest. However, are these just another money making exercise to fleece you of you cash? Read on to find out more.

As mentioned previously it’s essential to know how much money you wish to borrow, firstly to ascertain whether an unsecured personal loan is right for you. However it’s a good idea to only borrow what you need too. While it may seem like a good idea at the time to borrow a little extra to treat yourself remember that you will be paying interest on what you borrow for the duration of the loan, therefore that treat may end up costing more than you anticipated.

Remember too, since you are charged interest throughout the repayment schedule if you can agree to repay the money over a shorter time scale you’ll be paying less interest and saving money.

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Last update - 20th Feb 2006

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