Robert Sinclair (Director, AFB) gives expert video advice on: What is an unsecured loan?; What is an example of an unsecured loan?; How do I get an unsecured loan? and more...
What is an unsecured loan?
An Unsecured loan is a loan given by a lender to a person. And they do that without any terms or conditions with regard to a secondary payment vehicle or anything else to protect them in that loan.
What is an example of an unsecured loan?
An unsecured loan would be one given by a bank, a building society or another company, at a straight interest rate, over a set period of time. It is normally quite short term, less than five years, but could be up to ten. But they don't want any other form of what some people call collateral or security, to protect them in case that loan doesn't repay.
What are benefits of an unsecured loan?
Unsecured lending is normally quick and flexible. It's quicker to arrange than any other type of loan and also it then allows you to buy an asset, whether it be a car or something for you house in order to enjoy the benefits while you're paying for over the longer term.
What are the drawbacks of an unsecured loan?
With an unsecured loan, when you borrow any money, it brings with it obligations, the obligation to meet the repayments, therefore you do have to pay for it overtime. And if you have problems meeting that repayment then you need to deal with that appropriately and quickly.
What are risks of an unsecured loan?
The main risk in an unsecured loan is if when you have problems meeting the repayments. This can lead to problems with your credit history, and that will be lodged through some form of a debt recording agency, or ultimately if you fail to repay the loan in the time scheme, could end up with you being in court and subject to a county court judgement against your name, which also damages your credit history.
How does borrowing on a credit card work?
When you initially apply for a credit card, the credit card company will make an assessment of your credit risk and give you a spending limit, a credit limit on the card. That then gives you the capacity to spend or borrow up to that limit at any moment in time. Your obligation is to meet the minimum repayment on that card or repay the balance in full. The thing you have to remember when you borrow on a credit card is the interest rate you are paying on that can be quite high and therefore if you only meet the minimum repayments, then you will then be charged what some people view as significant amounts of interest in order to be allowed to borrow that money. Also if you fail to meet the minimum repayment on that loan then you may have a problem if the fees you are charged on top are expensive.
What are the benefits of getting a loan via credit card?
The main benefits of a credit card loan are that you will have flexibility. The credit limit is what's called revolving - so that as you spend on it and repay, the limit is always available to you - and that is the main benefit. It also is there to cover impulse purchases so you don't have to go back and ask for more money any time you want to do it, and you have total discretion as to what you spend that money on.
What are the drawbacks of getting a loan via credit card?
The drawbacks of loans on credit cards are that many customers find it difficult to live with a discipline of repaying. There has been much criticism of the fact that that revolving credit facility and the loans to do the repayments get people into debt. Therefore, with using a credit card for purchases, it's important that people are disciplined in doing that.
What is a personal loan?
A personal loan is where you make a loan application to a lender on a personal basis, normally for personal expenditure. It is exactly the same as an insecure loan and the two names are virtually interchangeable within the United Kingdom.
What are the benefits of getting a personal loan?
The benefits of a personal loan are mainly around budgeting, and also for fixing the amount of money. Normally, the purpose for the loan is so that you can fix both the amount of money you want to borrow, the term you want to borrow it over and you usually have do it with certainty. The amount of money that you've got to repay over that period of time helps with budgeting.
What are the drawbacks of getting a personal loan?
The drawbacks of the personal loan mainly revolve around problems in repaying. If you can't meet the monthly repayments, or you have difficulty in meeting the final payment and not repay the loan, then you can end up with adverse credit history with a bad footprint on your credit history, or you can end up in court subject to a county court judgment.
What is a bank overdraft?
Individuals can ask their bank on current accounts if they can have an overdraft facility. That is an allowance for the individual to withdraw money or write checks on their account and take what is generally called taking their account into overdraft or into debit. For that the bank may charge an arrangement fee or interest and therefore runs all the risks that normally run with borrowing money.
What are the benefits of getting a loan via a bank overdraft?
Overdrafts are normally provided in the UK on a revolving basis, although some can be for a fixed term. The benefit is that these are very flexible and can be used easily by customers, in that they're linked to their bank account. Therefore you can get the money very easily via either a cheque or via card through a cash machine. The interest rates tend to be reasonable and the fees for arranging it are normally not as expensive as other types of borrowing.
What are the drawbacks of getting a loan via a bank overdraft?
In the same way as any borrowing, there are risks if you have trouble meeting the payments or repaying that overdraft, or if you get into financial difficulties, the bank may withdraw that facility. That might lead to issues including being taken to court or court judgements levied against you. The other drawbacks are, it's hard to budget and maintain the discipline of repaying that overdraft. What many people end up doing is taking the overdraft and consolidating that debt onto a loan, and therefore finding a more structured way of repaying it.