An unsecured loan (also known as a personal or signature loan) is a loan taken out that is not backed up by any collateral. What this means is the loan is not secured by any tangible amount i.e. the persons property as would be the case with a secured loan. Instead the loan is based on a credit rating which is determined by the person’s previous credit history.
Is there only one type of unsecured loan?
No, there are three different types; personal, business and business with a personal guarantee. The first one Personal is as simple as it sounds, the person is responsible for the loan, and it is their credit history that the loan affects. The difference between a business loan and business loan with a guarantee is that with the personal guarantee, although it is the business loaning the money the person who owns the business is accountable for payment if the business defaults on any payments.
What is a credit rating?
This is the lending decision criteria; it takes into account previous credit transactions such as mobile phone bills, utility bills, mortgage payments, previous loan repayments etc. This then gives the lender an indication of your suitability and whether they feel your previous credit history suffices to loan you the chosen amount. This sort of lending which is unsecured as the name suggests, is based on a ‘good name’ basis. If you have previously had credit and not missed payments then this will have a positive result on your credit history. Sometimes not having had credit previously can have a negative reflection on your credit rating as they have no indication of whether you will keep up with payments or not.
What is the typical APR?
The APR is dependant on two things, the amount in which the borrower wishes to loan and the level of risk. For example if someone with a good credit rating wants to borrow a small amount then their APR will be quite low as there is less risk involved. Generally speaking the APR is higher if there is seen to be more risk, this is known as the rate-to-risk.
If you are currently looking for
unsecured loans then you may find looking for an
online loan will help you determine the difference between the various
loans on offer.
