Unsecured loans are personal loans. As they are not secured against collateral, many borrowers find them less risky in relation to secured loans. Unsecured loans are available from direct lenders, banks and credit unions, and each lending institution has its own methods to calculate the risk and decide whether or not to approve the application. Personal loans could be small and large, and therefore, their repayment length varies between months and 5 years. The repayment term hinges on the borrowing amount.
Unsecured loans are quite popular among subprime borrowers as well. The approval criteria are not strict, especially if the borrowed amount is not large. Money borrowed to meet small emergency expenses is not usually more than £1,000, hence paid back in fell one swoop. In some cases, the repayment term for small emergency loans would be only 14 days.
Risks linked to personal loans
Unsecured loans seem more affordable than secured loans in that there is no risk of losing your house in case of a default, but there are certain risks linked to these loans that make them even more expensive:
· High interest rates
Because unsecured loans for bad credit are convenient, you might be tempted to rely on them when you are in a tight spot. Personal loans charge high interest rates as they are considered riskier. Lenders do not have any security to repossess to cover their money in case of a default, and if your credit report is not up to scratch, you will find them even more expensive. The actual rates of personal loans could be three or four times higher. Your credit score is a determinant of interest rates. The higher the credit score, the lower the interest rates will be and vice-versa.
Most borrowers compare interest rates instead of annual rates while deciding on unsecured loans, which is not the right technique to lay your hands on the most affordable deal. Annual interest includes fees and associated charges in addition to interest rates. There are various comparison websites that compare personal loans based on interest rates. Unfortunately, that is not the right approach to compare between deals.
· Early repayment charges
No guarantor loans in the UK are also personal loans, but they are aimed at small emergency expenses. You will be given a month to discharge the debt. But those that come with a longer repayment term might enable you to repay the debt before the due date. Some lenders are out there who would not object to early repayments as long as the settled amount does not exceed the limit stated in the agreement.
Unfortunately, such lenders have quite high rates. Most of the lenders usually discourage borrowers from early settlement in that it diminishes the interest amount. In case you still insist on making a few instalments before they are due, you will be charged early repayment fees. Depending on the lender’s policy, these fees could be between 5% and 10% of the balance you pay off.
Early repayment is recommended when it helps save you money in total interest payments on the loan. Sometimes, the fees are so high that you end up paying the equivalent of the interest. If that is the case, you should avoid early settlement of the debt.
· There could be high upfront fees
Contrary to the claim lenders make, they charge upfront fees when you apply for unsecured loans. This is a one-off cost, also known as a processing charge. However, some lenders charge monthly fees as well.
Bear in mind that lenders do not disclose all facts about fees and related charges. You will see a full disclosure and bifurcation of fees and interest charges in your loan agreement. Make sure you thoroughly read it. The fine print should not be overlooked if you do not want ugly surprises at the end of the day.
· The risk of falling into debt is too high
The risk of falling into debt is too high with unsecured loans. Small personal loans are paid down in full within a very short period of time. It could be challenging to discharge the debt. Many borrowers often find these loans expensive and struggle to keep up with payments.
Because small emergency loans are not settled in instalments, you will have to roll over the loan. It will increase the cost of the debt as a result of late payment fees and interest penalties. Do not assume, however, that the risk of plunging into an abyss of debt is not high with long-term personal loans just because they are paid in instalments.
· Your credit score will be ruined
Even if you have taken out a payday loan, missed payments will be reported to credit reference agencies. Regardless of the size of personal loans, late payment fees and interest penalties are unavoidable, but you could forestall reporting to credit bureaus by clearing the outstanding dues within a month.
Missed payments will keep appearing in your credit file for up to six years. It means your credit rating will remain impaired. Every time when you borrow money, your bad credit rating will keep you from availing yourself of lower interest rates. Though old inquiries will not have much influence on your credit rating, chances of getting approval for lower interest rates are still slim.
How to use a personal loan responsibly?
Here is how you should use these loans:
· Take out a personal loan only when it is urgent.
· Do not use these loans in order to meet regular and discretionary expenses.
· Make sure you do not borrow more than you need.
· Personal loans should be used only when you are completely sure about your repaying capacity.
· Compare interest rates before applying for a loan from a direct lender.
The final word
Unsecured loans with bad credit are subject to some risks. Caution is enjoined. Make sure you use these loans when you are completely sure about your repaying capacity. Compare interest rates to ensure that you do not end up with an expensive deal.
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