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Types of UK unsecured loans

As mentioned above, essentially most UK unsecured loans are used to fund personal consumer spending. As such, the following are the main categories of unsecured loans you’ll normally see UK financial institutions offering:

1. Home Improvement Loan: Although unusual, it is possible these days to find lenders willing to lend home improvement loans as unsecured lending. That said, most home improvement loans in the UK remain firmly within the ambit of secured lending – if the lending can possibly do so.

2. Car Loans: Car loans are a very popular form of unsecured lending. Unlike hire purchase cars, essentially with a car loan you work out the borrowing with the lender before you pay for the car. You then pay the car dealer the proceeds of the loan as if the car purchase were a “cash-buy” and repay the lender in monthly installment, usually over 36 months, with accruing interest. Again, unlike in the case of hire purchase cars, with car loans the ownership papers of the car usually transfer to the borrower on the day the car is collected – but it is normally practice for the lender of a car loan to insist that the borrower take out fully comprehensive insurance.

3. Personal Loans: The mainstay of the UK unsecured loan market, personal loans can be taken out for any number of reasons, from going on a holiday to covering a short-term cash-flow problem.

4. Student Loans: with more and more of us (or our children and grandchildren) now looking to do tertiary education, but with the Government no longer willing to fund the costs of such education, many people who wish to further their studies do so by taking out student loans. Student loans can be obtained both from traditional lenders, such as high street banks, and from specialized lenders, such as the Student Loan Company (keep in mind, however, that unlike traditional lenders, the interest rate on student loans provided by the Student Loan Company are usually below market-rate, making them a much more attractive means of borrowing). In effect, the lender is betting on you succeeding in your studies and then not only repaying the loan plus interest, but also maintaining a bank account with them during the time you are a degree graduate high-earner.

5. Small Business Loan: With more and more of us wishing to become our own bosses, banks and financial institutions are usually willing to lend unsecured loans in the UK based on a good business plan as part of a small business loan. This business start-up loan can come with reduced rates of interest to help the borrower with their immediate cash-flow issues.

6. Mortgage Loan: Usually only provided to those who are property owners, a mortgage loan is a loan provided to those willing to mortgage the property in return for providing the lender with a mortgage over the property. As such, they are not, strictly speaking unsecured loans. However, where they may differ from secured loans, and be a hybrid-unsecured loan, is where the new lender does not have a first charge on the property, but is willing to stand second in line. An example of such a loan can sometimes be seen with home improvement loans.

7. Interest Only Loan: Interest only loans are loans provided to borrowers under the terms of which the borrower agrees to make periodic repayments of the interest only, with the principal being repaid in one lump-sum on the maturity date of the loan. Although not often seen in the case of a personal loan, an interest only loan is a very popular method of borrowing for businesses.
UK Unsecured loans and interest rates

Rates of interest on unsecured loans tend to be higher than those offered to secured loans. Having said that, it is possible to obtain cheap rate loans these days; especially if you are willing to spend some time searching the internet to find a lender offering online loan application forms. Notwithstanding the fact that you may be able to secure low interest rate unsecured loans, it is unlikely that you’ll be able to attract the same sort of low interest rates that you’ll find with secured loans. Also keep in mind that interest rates on unsecured loans are usually set as a benchmark against the Bank of England’s borrowing rates – and are usually known as MLR, or minimum lending rate. That said, as with secured loans, interest on unsecured loans usually accrue over the period of a month before being added to the principal of the outstanding loan, where they’ll be subject to interest accruing on interest unless you make repayment of the full interest amount due and payable on the next interest installment repayment date.

Again, as with secured loans, the best way to asses the level of interest being charged on your outstanding unsecured loan in the UK is to review the APR of the loan.

Unsecured loans and bad debt
Historically financial institutions in the UK would not lend unsecured loans to borrowers who had, or have, a bad credit rating. However, as with other forms of lending to those with bad credit, large sums of profits can be made lending to those considered risky borrowers and so more and more financial institutions are now willing to lend to those with a poor credit history. That said, if you do have a bad credit history and you are looking to borrow money from a financial institution: (1) expect to be offered less in terms of the principal amount you can borrower than would be the case if you were a good creditor; and (2) expect to be charged higher rates of interest than would otherwise be the case. Unfortunately, these two elements of bad credit lending seem to be the price those with bad credit histories are expected to pay for their previous mistakes.

Repaying your UK unsecured loan
UK unsecured loans can be repaid in one of two ways:
1. Monthly Repayments: by making installment repayments of a portion of the loan plus accrued interest on each payment due date. Repayment can either be done by standing order or by Bank Giro Credit – although the former method is usually the preferred repayment method.
2. Bullet-repayment: almost non-existent in personal unsecured loans, it is still possible to see bullet-repayments accepted as part of both car loan schemes and business loan schemes.

Cheap UK unsecured loans
By far the cheapest way to obtain an unsecured loan these days is to either: (1) obtain the loan off the Internet; or (2) have a very good relationship history with your UK bank and try to negotiate the interest rate with them. Having said that, UK high street banks do not usually provide cheap unsecured loans in the fashion often seen available online – preferring instead to regulate a uniform interest rate across the board of all their unsecured lending.

So, if you are considering taking out an unsecured UK loan, it is probably sensible if you do some research online, looking for the cheapest online unsecured loans you can find, filing in a few online loan application forms, etc., before you visit your local bank o apply for an unsecured loan. At least then you know what the competition is offering- and you never know, you may end up finding a very cheap UK unsecured loan online!