What are the Different Kinds of Unsecured Loans?
Understand what an unsecured loan is, and how best to use the different kinds of unsecured loans in 2023.
In this article, we'll cover:
There are many different types of unsecured borrowing and choosing the right one for you and your financial position can be a challenge.
Secured loans vs Unsecured Loans
If you’ve been looking to take out a loan, you’ve probably come across secured loans and unsecured loans. Lenders offer both types of loans, and it can be hard to know which type is best for your circumstances.
It’s important that you always compare loans before signing up for anything – and work out what type of loan you want. All loans will come with costs, including interest, late fees, and sometimes a setup or handling fee. The annual percentage rate (APR) can vary significantly depending on the lender, the loan and on your circumstance, so research is key when looking for an affordable loan to suit your needs.
If you’re ever unsure, it’s best to speak to a financial expert.
Your loan options will be based on your credit rating, and you’ll only be eligible for the best deals on the market if you have a very good credit score. Interest rates and repayment terms will depend on which lender you choose and how much you want to borrow.
What is the difference between a secured loan and an unsecured loan?
The key difference between a secured loan and an unsecured loan is that with a secured loan, you risk having an asset repossessed if you fail to meet repayments.
A secured loan is a type of loan that is secured against an asset such as a home or vehicle. Common types of secured loans are mortgages and car finance.
An unsecured loan is a type of loan that isn’t secured against an asset.
What is better, secured loans or unsecured loans?
Whether or not a secured loan or unsecured loan is better depends entirely on your financial situation.
Choosing a loan can be difficult as the market has many different types of loans. Here are some things to consider when applying for a secured or unsecured loan:
- how much do you need to borrow?
- what do you need to borrow it for?
- how much you can afford to pay back each month?
- what is the APR on the loan you're looking at?
- how long do you want to be repaying the loan?
Advantages of a secured loan:
- A secured loan is likely to have a lower interest rate as there is less risk to the lender where an asset can be used to recover their loss if you can't repay the loan.
- If you have a low credit score, lenders might be more likely to consider you for a secured loan.
- Lenders will usually be willing to lend larger sums of money if the loan is secured.
- You might get a longer amount of time to repay the loan.
Advantages of an unsecured loan:
- You won't risk losing your home or vehicle if you can't afford the repayments.
- Anybody may be eligible for an unsecured loan as it does not rely on being a homeowner or owning an asset of significant value like a vehicle.
What are the Different Types of Unsecured Loans?
Personal Loans
Personal loans can come in several different loan types. For example, payday loans are popular short-term loans.
Short-term loans can be appealing as you usually have the money quickly, and you’ll get a lump sum straight away. However, payday loans and short-term loans tend to have very high-interest rates. They can be expensive and end up costing you a lot more than the original loan amount.
There are other types of personal loans such as loans for large purchases, you might want a large sum loan if you’re starting a new business or relocating.
Student Loans
Student loans help many of us afford university and higher education. For many people, student loans may be the first type of borrowing obtained. Student loans help you pay course fees and living costs while you study.
Although student debts can total over £50,000 for an undergraduate degree, you won’t need to pay back these debts until you’re earning over a certain threshold, and then the money will come out of your wage before you receive it. The threshold depends on what years you borrowed the money.
Credit Union Loans
If you’ve been looking for loans, you might have come across credit unions.
A credit union is a cooperative that you can join in which members help each other by combining savings to provide each other with access to borrowing at a low-interest rate. To be eligible to join a credit union, you’ll need to have a common bond with the other members, such as sharing the same house of worship, being members of the same trade union, living in the same area or working for the same employer.
Credit unions can be a great way to give people access to a better deal when it comes to borrowing, but not everyone will have access to a credit union.
Debt Consolidation Loans
Some Debt Consolidation Loans are a type of unsecured borrowing. A debt consolidation loan can be a good option for people who want to borrow money because they are struggling with debt problems.
A Debt Consolidation Loan is a way to borrow enough money to repay your existing loans in one go, leaving you with one creditor, one interest rate, and one monthly repayment.
What is a Revolving Loan Facility?
A revolving loan facility often referred to as revolving credit, is a type of credit that allows you to keep withdrawing credit with a set credit limit. The most common type is a credit card.
It can be a good way to borrow money in small amounts for short periods of time. If you are consistent with your repayments, it could help to improve your credit score.
Summary
Key points to take away:
- Secured loans are loans that are secured by an asset, such as a house or vehicle.
- An unsecured loan is a loan that isn't secured by an asset.
- Choosing which loan is right for you will depend on your circumstances, your credit rating and what you want the loan for.
- Seek financial advice if you're unsure what the best choice is for you.
- If you're struggling with debts, consider a debt consolidation loan to pool debts together into one monthly repayment.
Don’t struggle with debts alone. Debt consolidation loans are a way to turn your monthly repayments into one affordable single payment.
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APRs from 5.8% to 89.9%
We are a broker, not a lender.
Unsecured Loan Representative 69.9% APR
Borrowing £7,500 over 36 months, repaying £502 per month, total repayable £18,083. Total cost of credit £10,583. Interest rate 69.9% (variable). The lenders on our panel offer loans for 12-60 months, with rates from 5.8% APR to 89.9% APR. The Representative Example is based on all loans paid out by lenders between 19th Apr 2022 and 23rd Dec 2022.
Secured Representative 11.7% APR
If you choose to add fees to the loan: Assumed borrowing of £25,000 over 120 months, plus a broker fee of £2,500 and a lender fee of £250 would result in monthly repayments of £345.55, the borrowing rate is 8.6% (variable), the APRC is 11.7% (variable), total charge for credit £16,466.00 and the total amount payable £41,466.00. You can opt to pay the lender and/or broker fees upfront, your adviser will discuss these options with you.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. All rates vary subject to loan amount, loan type and status. Repaying your debt over a longer period of time may increase the amount you pay.
