An unsecured loan is a type of personal loan.
This kind of personal loan is money that is lent to you that is not backed by any physical collateral.
In other words, it is a loan that you take out without having to secure any of your property against.
Unsecured loans are typically considered more risky for lenders because it is more difficult for them to get their money back should you default on the loan.
For this reason, unsecured loans typically have higher interest rates than other loans. Only take out a loan after you’ve read reviews of the products you are considering purchasing, on a trusted site such as reviewsbird.co.uk.
A mortgage is a special kind of loan. It is a large amount that is lent for a property purchase. The repayment terms are usually long, and the loan is backed by your house.
The mortgage lender keeps the deeds of your house as security. Should you, for whatever reason, not repay the loan, then they will fund the repayments by using the house as their asset.
With an unsecured loan however, there is no physical thing backing the repayment. The lender is taking on more risk because if you don’t repay the loan, they don’t have any collateral to use to recoup their losses.
Always read reviews of loan companies before you take out an unsecured loan.
Whilst traditional loans are the most obvious type of loan that is available to you, there are other forms of loan out there that do constitute an unsecured loan.
One of these would be a credit card. A credit card is, in effect, a loan.
The credit card issuer effectively lends you money and expects a repayment of either the full amount or a minimum payment at the end of the month.
It is for this reason that interest payments on credit card loans can be eye watering. Be especially careful with credit card borrowing, as it is very easy to quickly become mired in debt that quickly accumulates due to interest payments.
Remember, the risk to the issuer of unsecured loans is always offset by much much higher interest rates.
Another example of an unsecured loan is a student loan. Money is lent to you without you having to put up any capital or security.
The issuer is banking on your ability to pay once you have completed your studies.
Once again, the risk is offset by higher than normal interest payments.
Whilst unsecured personal loans do have their place, you should always offset the thoughts about what the loan can give you by thinking this:
What do I stand to lose?
Just because the loan doesn’t have any collateral backing does not mean that it is risk free. Interest payments can add up to a significant portion of your repayments, making repayment difficult.
Defaulting on the loan can also result in lengthy and distressing legal wrangling.