An unsecured loan implies the lender relies on your promise to pay back the money you have contracted to borrow. The lender is taking a huge risk agreeing to loan money without a security that they would receive with a secured loan. Therefore, expect interest rates for unsecured loans to be higher than they would be if you were to have some form of collateral. With an unsecured loan, you normally have certain payments over an agreed period and penalties may apply if you decide to repay the loan early. Unsecured loans are often more expensive and less flexible than secured loans, but appropriate if you want a short-term loan of between one to five years.

Examine your budget carefully

Before deciding to take out an unsecured loan, make sure you can afford it. Examine your budget closely to verify that you will be able to repay the money according to the repayment plan offered. You can do this by checking your income against your outgoing expenses to determine what you have left at the end of every month. This is a gauge to see what you can afford to borrow. If you find that your spending exceeds or is close to your income, think very carefully about whether you can afford to borrow additional money. Also, bear in mind that paying back loans and credit cards may become a problematic if interest rates were to increase, you lose your job, or another unforeseen event takes place in your life that renders you unable to make your repayments as scheduled.

The advantages and disadvantages of an unsecured loan

There are advantages to applying for an unsecured loan. Lenders offer a fixed repayment schedule so you can pay your unsecured loan off within a set time. This is a good safety net if you do not trust yourself to pay back the money you have borrowed with an overdraft or credit card. Lenders offer competitive interest rates, do your research, and select carefully.

If you think you may want to pay your unsecured loan off early be sure to check the terms to see if you will incur any penalties. Several lenders charge you the majority of the interest that you would have paid if you had kept the loan for the full term. An unsecured loan is not flexible; you have to pay it back according to your agreement, even when money is tight. Try to match the repayment period to the length of time you will own the item you are purchasing. You do not want to be repaying a loan when you no longer own the item.

The cheapest rates may be limited to those customers who show a good credit rating, or those who are borrowing larger amounts. Some lenders offer elective payment protection insurance and try to convince you to take it. This type of insurance can be a good thing if you become ill or lose your job; on the other hand, it might not be and is often expensive. You may have coverage of another form of insurance so do not be pressured into taking it out unless you need it.

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About The Author

John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the http://www.directonlineloans.co.uk website.