When compared with secured borrowing an unsecured loan is quite restricted. The sum borrowed is limited to £25,000, repayment terms are short and loans are not approved for risky or business purposes. When selecting your unsecured loan provider, it is important to keep in mind that lending is a business, thus, a lender wants to make money from you.
The cost of borrowing with an unsecured loan is the sum of the total interest paid and any charges. It follows that a longer term will mean a higher overall cost of borrowing. For this reason, it is prudent to take the shortest term over which repayments can be met. However, it is important to ensure that the term is not so short that monthly instalments are too high. This may lead to default on the loan and the lender may take legal action to recover the debt.
To make sure you get a good value loan, first you must prepare a repayment budget. Once you know how much you can afford to spend on repayments, you can compare the deals offered by various different lenders. Do not be tempted by low interest rates, without carefully reading the small print on a loan contract. If a rate looks too good to be true, on inspection of the contract it is likely that you will find extra charges, such as, an arrangement fee and early repayment penalty.
The interest rate on a loan may be fixed or variable. A fixed rate means that monthly repayments will remain the same over the term. A variable rate means the interest rate you pay will vary in line with the bank of England’s base rate. For the lowest cost borrowing, you should look for a loan with a low fixed interest rate, with no extra charges.
If you have a damaged credit score, it may not be a good idea to apply for a standard unsecured loan, as you are likely to be rejected, causing further demise to your credit score. The better option is to apply for a bad credit unsecured loan and before making an official loan application it may be worth speaking to a provider’s advisor to find out if you are likely to be accepted.
The key to successful borrowing is twofold. Firstly, do not take on more borrowing than you can afford to repay; and secondly research the loan market. Make sure you contact a variety of lenders. Providers vary so vastly in the terms and rates they offer. The only way to know if a deal is truly competitive is to compare it with many others in the market.