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Are unsecured loans and personal loans the same?
A search for personal loans on any major search engine will yield results for a high number of unsecured loan deals. Which begs the question: 'are unsecured loans and personal loans the same thing?' However, the answer is actually no. It's easy to think that personal loans and unsecured loans could be the same thing, but they aren't.
The industry uses the term 'personal loans' quite vaguely. Personal loans are loans taken out for personal reasons, so they're different to business loans, car finance loans or other sorts of lending. However, personal loans are any loans which we take out for our own personal spending.
It's possible to take out personal loans which are secured or unsecured. You can spend both of these types of personal loan however you like. There are also several different types of secured and unsecured personal loan available, so in this article we'll take a look at the different types of personal loan out there.
Secured Personal Loans
Secured personal loans are 'secured' against an asset, such as a home. This means that if you don't keep up with repayments on a secured loan, that asset (usually a property) can then be at risk. There are two specific reasons why lenders like secured loans.
The first and most obvious reason is that the lender is guaranteed to get their money back. In the event that the borrower cannot or will not repay the loan, the lender can always take the asset which the loan was secured upon in order to recover funds. That's bad for the borrower as they could lose their home or car, but it's good for the lender who won't be taking any risks by lending money to them.
The second reason why many lenders like secured loans is because with secured loans they can provide customers with more attractive deals that have lower interest rates and better payment periods. This in turn makes their products more appealing and more popular. Secured lenders can offer better deals to their customer due to the reduced risk of borrowers defaulting on payments. People tend to take secured loans far more seriously and make repayments in full and on time, while they can be less reliable when it comes to unsecured loans.
Unsecured Personal Loans
Like secured loans, unsecured loans can be used for any purchases but unlike their secured counterparts, unsecured loans are not secured against a property or other assets. So, in principle there's no risk of a borrower losing their home.
However, in practice people can still lose their homes with unsecured loans too. This is due to widely used fine print called 'Charging Orders'. Charging Orders allow lenders to reclaim unpaid debts on unsecured loans by forcing the sale of any assets which a defaulting borrower owns. The use of Changing Orders has been rare until recently and Northern Rock and Nat West are the two lenders most commonly using the clause.
Generally, people borrowing money as an unsecured personal loan might not have any assets at all such as a car or house and in these cases people who default will still be taken to court if they refuse to repay their loans. This is still the case even if Charging Orders won't affect them because the lenders will still need to get back the money they lent.
If you find yourself defaulting on an unsecured loan you should still take the matter very seriously and try to reach agreements on when and how you will repay your debts. You can also get debt advice from a number of reputable organisations.
Personal Loan Advice
If you experience difficulties re-paying any sort of loan, whether it is secured or unsecured, there are many options at your disposal. These include, consolidating any separate debts in to one easier to manage loan, taking out an IVA (Individual Voluntary Arrangement) or even, in some circumstances filing for bankruptcy.
To determine what would be the best solution for you, consider getting some free advice from the Consumer Credit Counselling Service, Citizen's Advice Bureau or another free impartial service. Often charities like these can offer advice for free which some other organisations will charge you for.
There are benefits to both types of loan. If you know you'll make repayments and you own a property you can take advantage of the lower interest rates and shorter repayment periods. If however, you might miss re-payments or dislike the risk involved with a secured loan, an unsecured loan can still be a good financial product. It's always important to shop around for loans using several comparison websites and to apply for loans which match your personal circumstances and credit score.
Unsecured Personal Bad Credit Loan
If you are in arrears with a credit card or loan, have been late or missed payments, or have a CCJ (county court judgement) you will have bad credit. An estimated 1 in 5 people in the UK have bad credit - it can happen to anyone, and if you find yourself with a bad credit rating there's nothing you can do until you deal with your arrears and get back into good credit again. But if you are looking to borrow money, there are possible options depending on your circumstances. One of them is called an unsecured loan for bad credit.
An unsecured loan for bad credit will not require any security for the loan amount you intend to borrow. Secured loans demand collateral against the loan, which ensures that the loan company can recoup the loan amount if the borrower defaults on repayments by selling the collateral, which is usually their home. Borrowers who do not own their home may decide that an unsecured bad credit loan is for them, but if homeowners do not want to put their homes at risk and secure loans against them, they are also free to apply.
Since the borrower is not required to provide security against the loan and is already in bad credit, the lending company will reflect their increased risk in higher rates of interest. Although the lender has no claim on any assets, when loan repayments cannot be met, they may resort to alternative means of legal action to reclaim the loan.
The interest rate that a borrower is offered for an unsecured bad credit loan will be completely dependent on the borrower's specific personal circumstances and the interest rate offered will not be the same as someone else's. The loan amount, borrower's income, credit score and financial situation will all be assessed to determine a specific interest rate. Many companies offering bad credit loans will provide a free quote so it makes sense to spend a few minutes supplying some basic information to compare quotes between several companies. Do remember that these quotes will only provide an approximate idea of repayment terms, as your circumstances will need to be assessed in far greater detail when you come to make a formal application. It is quite possible that the amount you are asked to pay will differ from the initial quote.
If you know you have bad credit, it is useful to have an awareness of the credit scores used by financial institutions. A credit score is a three digit number ranging from 300-850. Credit scores above 720 are considered to be good, whilst those below 600 will be labelled as bad credit. Grades are given in accordance with your credit score ranging from A to E. People with bad credit will tend to be graded C, D or E. Knowing your personal credit score will enable you to ensure your loan is based on the correct score to avoid being charged more for a worse rating.
Unsecured bad credit loans tend to start at a minimum loan amount £500 to as high as £25,000. For very low amounts it is likely that there may be a better form of lending that will have lower repayment structures so it would be sensible to research for the best option for your personal circumstances before opting for a loan. Unsecured loans tend to have fixed rates of interest which helps the borrower manage their repayments better as there is no likelihood of the payments increasing over the term of the loan as interest rates go up. (Of course this will also mean that the repayments will not decrease either if interest rates are reduced any further.) There are no restrictions on what you can use these loans for, such as home improvements, university fees, debt consolidation, holidays, buying a new car or paying for a wedding.
If you have a less than perfect credit history, then being approved for an unsecured loan from a mainstream lender may prove to be difficult, especially in the current economic climate. But a thorough search of the internet and money comparison sites may give some good ideas, although it is a good idea to check that the company from whom you choose to borrow is regulated by the Financial Services Authority (FSA) and that you familiarise yourself with the terms and conditions of any loan before you sign on the dotted lines.
Providing you keep up with all the repayments, an unsecured bad credit loan could help you mend your credit history, since you will have proved that you are no longer a credit risk. This should enable you to apply for more competitive deals in the future.
Can I Apply for Debt Consolidation?
Debt consolidation is about taking all your various loan arrangements and turning them into one single obligation with a lower monthly payment than all the previous loans individually.
Over time, you may have taken loans for a variety of purposes such as to buy a car, acquire furniture, take a holiday or may have just let the credit card spending get a little too far out of line. All of these different loans may have been taken out with repayments linked to a variety of interest rates and repayment periods. As such, you may have a number of shorter term, high rate borrowings where it would make sense to refinance these over a longer period at a lower rate. This may certainly be the case where credit or store card debt is concerned. In these trying times, you will now reap the benefit of a good credit history so do try to make sure that you keep up with any repayments whilst renegotiating additional funding. If you have a poor credit history, be prepared to explain why you missed payments in the past or expect more expensive terms.
So what are the options and how does it work?
Firstly, you should sit down and make a clear budget of all your sources of income and all your regular monthly commitments. This will help when working out how best to go about consolidating your loans and working out what you can sensibly afford to pay as a monthly instalment.
Once you have your budget worked out, the next step is to look at whether you have any equity in your house (this is the current value of the property less any outstanding mortgage on the property). If you do, you may be able to raise finance more cheaply by looking to remortgage your home and release some of the value to pay off current debt.
Now you have a clear understanding of your income and outgoings with a clear view of any equity you may have in your home. If your debt exceeds £5,000, you are likely to need some form of security for the loan either by way of mortgage (requiring the spare equity) or other credit enhancements such as guarantees from parents or others with worth. The more security or credit enhancement you can bring to the discussion, the better the terms of the loan that you will be able to command.
Either way, you are now ready to tackle the market and get some quotes! Firstly, it would be worth approaching your existing mortgagor since it would be relatively easy for you to draw additional cash from the value of your house. There will be fees payable but it will probably be the cheapest way to get the best deal.
There can be a significant interest rate saving for a secured loan although the agreed period of the loan and set up can be longer. You should also take care when looking at the period for the loan. Spreading it too far into the future can mean that the total repayable can be considerably more than borrowed. Be realistic when looking at repayment terms and give yourself the opportunity to pay off the loan in a sensible period without stretching yourself unrealistically. Take care, though, if you fail to keep up with the payments in the future your home may be at risk.
Unsecured loans can be quick to agree. Once the credit searches are completed and you provide evidence of earnings and expenditure, the facility can be agreed within days of you applying. As with as a secured loan, make sure that the repayment period is not unrealistically long since this will increase the total amount repayable.
In either case, the loan provider may also be happy to facilitate the payment of the outstanding debt to your other creditors on your behalf. Hence, you can avoid any temptation to divert the money into anything other than getting you back on the road to financial recovery.
However, you should always get a quote from at least two other providers. There are any number of agencies and companies offering to source quotes for your debt consolidation loan. Amongst these is www.debtadvisersdirect.co.uk who will also guide you through the budgeting process if necessary. Similar firms are www.moneyexpert.com and www.arrowloans.co.uk.
Remember that you are not under any pressure to enter into any arrangement until you are ready to do so. Independent debt advice can be obtained from any Citizens Advice Bureaux (www.citizensadvice.org.uk/).
At the end of the process you should enjoy the benefits of a lower monthly outgoing and some income left to help enjoy life.
Debts spiralling out of control?
Consolidation with an unsecured personal loan or a Debt management plan could see you debt free sooner than you think
The effects of the credit crunch – which has, in fact, become the worst recession since the Great Depression of the Thirties – continue to be felt throughout the U.K., with no sign of an end in sight. Personal wealth has been eroded by falling house prices, and rising unemployment – forecast to reach three million by the time the recession is over – is contributing to financial stress, and higher debt levels for many households. At the end of April, 2009, each household in the U.K. was indebted to the tune of £9,000, excluding mortgage debt, and the debt advice market has never been busier, as many consumers struggle to manage their finances. That said, the fact that you are not alone in your financial worries should not be seen as a reason for complacency. You, and you alone, are responsible for your debt problem, and you need to take decisive action to resolve it.
Unsecured Personal Loan
If your total level of debt is not excessive, but you find yourself juggling repayments between credit cards, personal loans, and other credit agreements, you may find that a consolidation loan is the best solution for you. This essentially involves taking out a further loan, for an amount sufficient to repay all of your existing borrowing, and hence "consolidating" your multiple monthly repayments into a single repayment for a lesser amount. You obviously need to take the APR, or "Annual Percentage Rate", of a consolidation loan into account, but, carefully chosen, this may not only improve your immediate cash flow, but also allow you to avoid late, or missed, payment charges, etc..
An unsecured loan is one for which no collateral, or security, is required. As such, it is a riskier proposition, in the eyes of a lender, than a loan secured on property or other assets, and may therefore be correspondingly harder to come by, and expensive, especially for those borrowers with below average credit ratings. If you do have a good credit rating, however, and wish to borrow a smaller amount over a short period, an unsecured personal loan may still be a good solution.
From a borrowers point of view, it is worth remembering that, although the risks associated with an unsecured loan are less than that associated with a loan secured on property, failure to keep up repayments can still result in additional fees and charges, and impairment of your credit rating. Furthermore, once you receive funds, it is imperative that you pay off all your existing creditors, in full, and close credit cards and other accounts. Even with the best intentions, the temptation of multiple lines of credit may otherwise prove too difficult to resist.
Debt Management Plan
A Debt Management Plan, or "DMP", for short, is a simple, yet effective, way of managing your non-priority debt. It is something that you can implement yourself, if you have the time and inclination to do so, but, more commonly, will be managed by a debt professional. A debt professional from one of the charitable debt advice agencies, such as National Debtline, or a similar, fee-charging agency, will calculate how much you can afford to repay once your priority debts – mortgage, rent, utility bills, etc. – are taken into account. This necessitates a thorough examination of your financial circumstances, including income, expenditure, to whom you owe money and how much. Any money left over, above and beyond priority spending, is either divided up between your creditors, or paid to an agency, which takes a percentage for administering the plan and divides the remainder between your creditors. If you decide to use a commercial agency, do be careful that as much of your monthly repayment as possible goes to servicing your debt, rather than paying the agency.
There is no guarantee that your creditors will agree to accept reduced payments, at all, and if they do, it is only likely to be for a limited period of, say, six or twelve months. That said, if your debt problem is temporary, and likely to improve within twelve months or so, a Debt Management Plan can be an effective debt solution. A DMP will continue until such a time that your debts are cleared or, more likely, you end the plan voluntarily. The latter is often true when your financial situation improves and you are able to resume monthly repayments in full. Details of a DMP will appear on your credit history file, impairing your credit rating, so that you may find it more difficult to obtain credit in future.
Will Lenders Agree To Lower My Monthly Payments?
As time and circumstances change, what was once affordable can become a millstone. No matter whether it is a long term illness, redundancy or just a change of personal circumstance that drives it; if you have insufficient monthly income to pay all the bills it could be time to look at ways to reduce some of those obligations.
The first step is to complete a full and honest budget of all monthly income and expenditure. And don't forget to allow for those infrequent bills like car road tax, TV licence or telephone bills. Once you have a clear picture of what you have in terms of commitments and income, then you can start planning how to reduce some of the variable costs like loan repayments.
It is crucial that you continue to make payments on time so as to keep your credit history as clean as possible. This will make your proposition to lenders far more appealing than if you have started to miss payments since this will automatically show on your credit history report.
Now you have a full and realistic picture of what you can afford each month in terms of payments you are in a good position to approach your lenders and discuss how you might change the payments to make them more affordable.
Think carefully about which loan repayments would, if changed, have the most beneficial effect on your monthly budget. What you are trying to achieve is a balance between paying off the debt in as short a period as makes sense whilst making sure that it is comfortably affordable. Where loans have a short period to run (say less than 4 months) it will not usually be worthwhile trying to change their payment profile since there are likely to be fees involved that may outweigh any benefit. However, if these are substantial payments then looking to re-schedule them over a longer period may have the desired effect. Equally, if you have very high interest bearing loans then asking to have them rescheduled may be very expensive in the long run.
If you feel that you can get back under control by changing one or two commitments then approach your lender and ask what can be done. This is best done on the telephone since there will inevitably be some discussion over options but you should always get a written quotation for any variation of payment terms discussed before you agree to them. Your lender is not under any obligation to vary the payment terms but most will accommodate a change that they can see will be to their advantage as much as it is to yours.
If the loan repayments you are looking to reduce are for your home mortgage then you should definitely make an appointment, where practical, to meet with your lender. Take in your budget and explain what you are seeking to achieve and they will listen sympathetically to your request. Once again, this is best done whilst you are up to date with your repayments as it shows that you are in control and thinking about your situation before it becomes a problem. Lenders do not like surprises – especially bad ones!
If you have a number of loans and there is no simple or easy way to reduce your monthly payments then it may be worthwhile looking at a debt consolidation loan. Here you will apply for a brand new loan and use the proceeds to pay off all your other creditors. This way you can reduce all your various monthly payments to one single amount over a sensible period and, provided your credit history is in tact, at a sensible rate. To do this you should get settlement figures from each of your creditors so you know what sort of loan amount you will need. If the total is over £10,000, you may need to consider a loan that is secured against your home (if you have that amount of free equity available). Therefore, one of the first ports of call may well be your existing mortgage lender to see if they will advance further money against the value of your house. This can be one of the cheapest and most effective ways of paying off debt in an affordable way. Be warned, however, that the payments may be low but the total amount repaid could be high since the repayment period is long.
Lenders will always be sympathetic to requests for a change in payment provided you are proactive, supply plenty of information on your personal circumstances and keep your account up to date at the time of the request. They will also help if you get into arrears but by then you will already be incurring late charges and have less bargaining power.