Most people don’t tend to know the difference between the different types of unsecured loans you can receive, this is because lenders intentionally make it hard for you to understand what options you have available. This is done for a few reasons but mainly money, most lenders understand that if you can’t find the cheapest product on the market will take what’s in front of you which is what they offer i.e. the most expensive.
Loans come in many different forms an unsecured loan is a loan that is guaranteed by the person themselves depending on their credit score. If your credit score is good it means you will not have to secure the loan against property or have a guarantor. There are lenders out there that will lend to somebody with a low credit score but this generally comes at a high APR cost which results in the loan being very expensive sometimes you are also required to use guarantor loans if your credit is that poor rather than the traditional unsecured loan.
These type of loans do tend to have a higher APR rate because it isn’t secured against any property or person this results in this form of loan being higher risk to the lender which is why you’ll find the APR will reflect this. One thing to note 9 times out of 10 these types of loans still come in cheaper than payday loans or credit cards. These type of loans tend to be a very good option for people that don’t own their own property or have their own vehicles to secure the loan against.
These type of loans can be spread across a varied amount of term most commonly an average loan last for about three years. Each loan repayments that you pay back to the lender will have an element of both capital and the interest of the loan this way you see the balance coming down on a monthly basis rather than alone being front loaded interest which means you pay interest first is done on a rolling monthly cycle.
How do lenders make their money?
Interest – You will pay a rate of interest dependent on what the lender sees fit dependent on your creditworthiness and the amount of profit the lender would like to reach from each loan itself.
Fees – Some loans charge an arrangement fee or otherwise known as a setup fee this can often be placed onto the loan amount itself and can be paid off within your monthly payments please be aware if you do miss a payment this will result in you paying a higher interest amount.
Upsell – Most lenders at the point of sale will try and sell you their other products, products like their payment protection insurance or credit cards or a mortgage this is a very common tactic for lenders to make the most out of each and every customer that they get through the door or over the phone.
Why do they do this?
Simply because there is a lot of profit in unsecured lending they try to make a profit from other areas.
The most common misconception is an unsecured loan is the same as a payday loan which will cost you 50% 60% 70% APR or sometimes even higher. This isn’t correct at all an unsecured loan is a total different type of lending to that of a payday loan.
Each year you will start to see a price war between the lenders in terms of their APR offerings at the moment there are some lenders with as low as 3.5% APR you must be careful and must check these thoroughly as sometimes there are catches within each of their contracts.
Some of the basic things you must always do before applying for a loan is to make sure you can afford the monthly repayments. This is one thing that often catches people out because they forget that once it had the money it does need to be paid back. The most you hear of a personal loan or unsecured loan amount being is up to 25,000 this will result in an average repayment on a monthly basis of being near the £500 mark this again relies on you having an extremely high and extremely perfect credit score.
Some people are under the common misconception that a credit card is a much better option than a personal loan this sometimes can be true but this really takes very good budgeting for example you can receive a credit card these days that has up to 21 months interest-free credit which is fantastic but after those 21 months your interest will be quite high and if you haven’t managed to pay off the amount that you have placed on the credit card you will get stung massively this is why I would always suggest an unsecured loan is a better option for most people because it will be spread over 36 months and you will know the monthly repayment that you can make this loan will also allow you to overpay on a monthly basis which will shorten the term of the loan. The problem with most people using a credit card is they put the money on the credit card then forget to make the monthly repayments because the credit card company will not chase you for these payments and you will find out 21 months when the interest is being put on.
I would never ever suggest under any circumstances paying money off an unsecured loan using a credit card this technically is illegal because it is paying finance with finance which will only end up getting yourself into more debt if this is something that you are doing on a monthly basis I would suggest you speak to one of the free monthly charities that will advise you on the best way to get yourself free of debt.