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Unsecured Loans

What are "unsecured loans"?

Unsecured loans enable you to borrow money without offering any security in return to the lender (see our article on secured loans for more information about 'security').

This involves a greater degree of risk for the lender. With unsecured loans, if you fail to keep up the repayments, the lender cannot simply repossess your property to recover their money.

Therefore, this might also seem to involve less risk for you. However, it is important to remember that, although you haven't offered any security, you are still liable to repay the loan. If you fail to keep up the repayments, the lender can still take steps to recover their money from you, though for unsecured loans it is a more difficult and involved process.

Why choose unsecured loans

Unsecured loans are usually more expensive than those where no security is offered. However, they can be very useful in situations where it is inconvenient, too costly or impossible to arrange secured loans, such as:

purchases of small value
you rent your property
the value of the property you own does not exceed the value of your mortgage

Lenders will offer unsecured loans to people who they think are low risk. The types of factors they take into account include whether the borrower:

has a good credit history
has lived at the same address for a long time
is in a secure job
is known to the bank (eg: an existing customer)

What can go wrong?

If you fail to keep up the repayments on an unsecured loan, you won't instantly lose your home. At the very least, this will affect your credit rating, and limit your ability to borrow money in the future. However, you still owe the lender money and they can take steps to reclaim their money back from you.

For unsecured loans lenders have to follow much more length procedures than if they held your property as security. However, the law is still on their side and they can instruct solicitors to recover that debt from you.

For small amounts of debt, this might result in CCJs (County Court Judgements) being issued against you and, in extreme, bailiffs can come to your home, take your property and then auction it in order to repay the debt.

For larger amounts the lender might have to take costly legal action, but ultimately you will have to pay their costs. In the extreme, the courts have the power to take and sell any property (house, car, furniture, etc) that you own to repay the debt, and/or to make you bankrupt.

Can I avoid these problems?

As with secured loans, you should make sure you can afford the repayments before you take out the loan. This involves producing a budget. If you don't know how to produce a budget then get someone to help you. There are various charities that can help in budget planning (eg: Credit Action) if you don't know anyone personally who can help.

Take out insurance against unforeseen events, such as accident, illness or redundancy. These are usually offered at the time of the loan by the lender, and the premiums form part of the monthly repayments, but these policies can be expensive. It is worth getting a quote from an independent financial advisor, either for insurance to cover your secured loans, or for more general insurance that covers all eventualties. Note: if you are made redundant or become ill, your repayments are not the only bills you will have to meet, so it is worth investigating insurances, such as Permanent Health, Critical Illness, and Life cover, that will also cover all your other financial commitments.

If the worst does happen, and you can't afford to make the repayments, don't ignore the problem. Talk to the lender and try to negotiate a rescheduling of the loan to a level you can afford, or temporary reduced repayments until you are able to start making full repayments again. For example, you could offer to meet the interest charges but temporarily suspend the repayment of the loan. The attitude of banks and lenders will vary greatly to ideas such as this, but if you can show you will pay something, and have an alternative plan for paying off the debt in the long term, you are much more likely to get a positive response. If you find this planning and negotiation difficult, a debt counsellor may be able to help you with both.