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An unsecured loan is a loan that does not require solid brick and mortar as a security against the loan. In other words, your property is not put up against the loan as a backing for the same. Hence lenders face a higher risk on such loans. In case the applicant files for bankruptcy, there is no way that they can recover the money. Therefore the rates of interest for unsecured personal loans tend to be higher than other types of loans.
Generally, lending institutions such as banks and building societies offer unsecured personal loans. Personal loans are not available for business purposes and for certain other purposes such as buying timeshare properties etc. You will need to check out about the exclusions with the lender before you apply for the loan
Repayment terms
Unsecured personal loans are available for a range of different amounts and repayment terms. The repayment terms will depend on the purpose for which you require the loan and the time period would be set accordingly. The lender charges an interest on the loan which is generally quoted as a percentage figure, known as the Annual Percentage Rate (APR). A thumb rule is to compare the APR's of different lenders. A comparison shows you how competitive the rates are and helps you decide on the best deal.
Interest terms
Different lenders quote personal loan interest rates differently. The two main types of interest rates are -
Fixed interest rate - A fixed interest rate will stay unchanged throughout the term of the loan, regardless of any changes in the bank base rate.
Variable interest rate - A variable interest rate may rise or fall depending on any changes in the bank base rate.
The lender will mention to you if you have been offered the "typical rate". A "typical rate" is a rate that is generally offered to over 50% of successful applicants, and the exact rte offered will depend on the applicant's personal circumstances, the amount and term of the unsecured personal loan along with the credit assessment procedures.
Unsecured personal loans are generally repayable monthly. The lender may allow over-payments or lump sum payments that allows you to clear the loan in shorter-term period than agreed at the beginning. The catch here could be that, some lenders will charge you a penalty for repaying your loan early. Some lenders offer "payment breaks" or "repayment holidays" as a part of the loan package. These allow you to take a break from your repayments at the beginning of the loan or at any agreed point during the term. Interest may still accrue on the balance outstanding so the exact terms should always be verified with the lender.
Other useful information
Secured loans are the type of loans whereby they require collateral in the form of a property as a back-up for the loan.
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