A loan sanctioned or given only on the basis of the borrower’s financial position, creditworthiness, credit history, and personal reputation, without engaging any collateral is called an unsecured loan. Here borrower signs a promissory note but does not hypothecate any specific asset(s) as collateral security, and so this is also called a signature loan. Since the risk of the lender is high, higher interest rates are attached to such loans.
Even with the various risks factors, the demand for the unsecured loan in the UK is growing. It is important to understand what an insecure loan is so that you can choose wisely when looking for financial assistance. Loans are of many kinds and needed for various things like buying a house or a car or student loan.
Whether you are a borrower or a lender, knowing about the unsecured loan will help you make better financial decisions. Here are a few essential things you need to know about the unsecured loan:
Examples of unsecured loans
• Personal Loans
Some of the most common examples of unsecured loans in the UK are personal loans, credit cards, medical bills, and payday loans. Among the above, the personal loans are the most common types of unsecured loans. For personal loans and credit cards, the banking companies take the general information such as name, social security number, address, and employment information of the borrower along with his place of work and proof of earnings. They consider the option of loaning out a certain amount of money based on the ability to payback.
• Medical Bills
Medical bills are another form of unsecured loans wherein the hospitals provide care and regarding insurance is provided upfront. However, there are a number of costs that are not covered by the insurance company and the patient party is liable to bear those expenses. A patient party signs an agreement before receiving any care or treatment that they will be responsible for any portion of the bill for which the insurance company does not pay.
• Consolidation Loans
Loan consolidation is a process of combining all types of loans into one loan or debt and then acquiring another loan to pay off the first one. Loans can be any time, like a home loan, student loan, credit card debts and others too. While loan consolidation may seem the best option, it is an example of unsecured loans. The ability of the borrower to pay back isn’t high and the lenders may not recover the entire loan.
• Payday Loans
Payday loans are the short terms loans provided by a financial institution for a short period of time. The loans are lent on the terms that it will be repaid with the next paycheck. This type of loans is not secured by collaterals and hence is a type of unsecured loans. The lenders though have a secure means to recover the loans by postdated checks and automatic withdrawal from the checking account.
The Risk Factor for the lender
The element of risk with any loan, whether secured or unsecured always exists. But in case of unsecured loans in the UK the risk is more as the individual or an entity seeking the loan might falter payments because of unforeseen reasons like sudden joblessness or death of the principal bread earner, which might lead to a situation wherein the lender might end up walking away with nothing. So it is better to keep in mind that “Don’t loan out money unless you’re prepared to be without it”
The Risk Factor for the Borrower
The other risk associated is for the borrower. With the secured loans, the lender can recover the loans by repossessing the collateral. On the other hand, a lender cannot recover an unsecured loan that easily. They can either ask a collection agency to collect the debt or take the defaulting borrower to the court. In case the judgment goes in favour of the lender, the best that can happen is that the borrower wages will be garnished or lien be placed on the property.
The unsecured loans have higher interest rates for obvious reasons. So, in the long run, you will have to pay more. A secured loan, on the other hand, has less interest rate. In case your financial health isn’t that great, you should avoid piling on the existing debt. These types of loan are best suited for emergencies only when you don’t have other options.
Thus, in a nutshell, any organization, banking or non-banking financial institution issuing loans in the UK agrees to loan out to money with the agreement that the second person will pay interest when he/she repays the loan. This type of lending is increasing in popularity, mainly because of the almost complete anonymity.