card guide
Unsecured Personal Loans [Part 3]

By far the majority of all personal loans in the UK are unsecured. 

‘Unsecured’ here means that the lender does not require the borrower to give them security over any of their assets in case they default.  If they were to default, the lender would then start legal proceedings and enforce against the security, which would then be sold in order to repay the debt.  Conversely, with an unsecured personal loan, if you cannot repay the loan than the lender has to wait in line with all of your other unsecured creditors before they get repaid any money.

As you can see then, there is a certain element of risk with unsecured loans, i.e. the lender may never get repaid!  You would think then that interest rates would be much higher with the increased risk?  In fact, it works the other way.  While the interest on unsecured loans is typically higher than those you find with secured personal loans, within the ambit of unsecured loans, the more you borrow, typically, the cheaper the interest is. 

The main reason why this is the case are two-fold:

(a) on the one hand, administrative charges for setting up an unsecured personal loan are higher, proportional to the amount being borrowed, the less you borrow; and

(b) typically, borrows have more opportunity to negotiate the interest rate (Annual Percentage Rate or ‘APR’) the longer the term of the loan.  The reason why this is the case is because, ordinarily, the lender will fix the interest rate throughout the term of the unsecured personal loan – and the longer the term the more chance there is that interest rates will change (go down) and you’ll be paying a relatively high interest rate.

Typically, unsecured personal loans are for periods of one year and more.  If you want to borrow for less than one year, lenders tend to prefer that you arrange an overdraft.  While there is no real maximum term for unsecured personal loans, market practice indicates this to be between five and 15 years.

From an administrative point of view, you should note that your personal loan will be opened as a separate account to your day-to-day current account (unlike with an overdraft), and does not even need to be with the same bank.  Once the unsecured personal loan has been approved, you will be asked to sign a direct debit mandate which will authorise the lender to withdraw a fixed sum of money from your bank account each month, which will eventually pay off the interest and principal over the term of the loan. 

Aside from your initial drawdown, when you request the money, you will not have any further business with the personal loan account and, in most cases, you are only allowed one drawdown (although this can change with the more you borrow).  Importantly, however, is to make sure you arrange that the direct debit be taken out of your account either on your pay day or shortly thereafter.  Remember that if you have insufficient money to pay the loan repayment, the direct debit will ‘bounce’ (be recalled) and you will incur high charges.  Strange as it may seem, this is still the case when the lender is the same bank as the one which you bank with.


Posted on: [ January 05, 2018 ]       Add to Del.icio.us   Digg it   Add to Blinklist   Add to FUrl   StumbleUpon