What Is an Unsecured Loan, How It Works, & How to Get One?

An unsecured loan is a loan that does not require any collateral or security deposit to get. This means you do not have to put up any asset you own, like your home or car, to borrow the money. The loan is given to you based only on your creditworthiness.

Secured loans are different. They require collateral to borrow. For example, a home loan taken to buy a house always has the house itself as collateral. If you cannot pay back the home loan, the bank can take the house and sell it to recover their money. Similarly, an auto loan to buy a car uses the car itself as collateral.

Unsecured personal loans do not take such pledges or deposits before lending. They carry more risk for the lender, so they usually have higher interest rates than secured loans. The advantage is quicker approval and no fear of losing a valuable asset in case you cannot repay on time.

Getting Unsecured Loans with Bad Credit

People with very low credit scores usually find it difficult to get loans from banks or NBFCs. But today, there are digital lending companies that specialise in giving unsecured personal loans with bad credit history to people. They also have no guarantor requirement. They mainly rely on alternative data about you, beyond just your credit score, to decide eligibility.

What is Bad Credit?

Simply put, bad credit means you have a history of late repayments, defaults or other issues managing loans and credit cards. This gives you a low credit score. In the UK, scores below 650 on a score range of 300 to 900 are seen as subprime or bad credit. If you have no credit history or an irregular one, you may also be considered high risk.

Factors that Help Get Loans

Lending startups that give unsecured personal loans for bad credit look at your full profile before deciding. This can help improve chances, even if your score is poor.

• Stable income – Even with bad credit, stable earning helps establish the ability to repay. Salary, freelance work, business, etc. all count.
• Length of employment – Working at one stable job for long, despite bad credit, can increase lender trust.
• Education – Higher degrees often allow higher income potential, making you seem responsible.

How Unsecured Loans Work?

Lenders see your credit file to know if you have missed or delayed any bill payments before. This record shows if you can be trusted to pay back.

If all your bills are paid on time, your record is good. So lenders feel you are responsible. They will lend higher amounts to you at better interest rates.

The benefit of these loans is quick approval without a car, house, or gold kept as a deposit. Lenders give money based only on borrower trust and credit record – not assets. So, even people without big assets can apply and get funds.

Getting An Unsecured Loan

First step – check your credit score from agencies like Experian or Equifax. This gives an idea of the loan amount and interest you can expect. Many websites allow free credit checks.

Compare Lenders

You can use online tools to compare interest rates from different loan lenders in the UK based on your score and needs. Pre-approved offers also show your approval chances. While applying, share ID proof, address proof and income statements like payslips, bank reports etc.

New age fintech lenders need less paperwork than banks – mostly soft copies uploaded online suffice.

Uses of Unsecured Loans

The flexible nature of these loans makes them helpful for all short term needs – urgent medical costs, school fees, etc.

With easy approval and direct money transfer to banks, their popularity has grown. Based on their profile, borrowing amounts typically range between £5,000 and £ 15,000.

Easy application and quick funding access make them vital for all UK borrowers with sudden financing needs.

Pros and Cons of Unsecured Loans

Unsecured loans depend only on the borrower’s ability to pay back as promised. Lenders check income proof, job stability, past credit record and other details before approving.

Pros of Unsecured Loans

Here are the pros:

No Asset Necessary

The key benefit is quick approval without needing to put down a car, house or valuables as security. Lenders give money based on trust in the borrower – not assets. So even people without big assets can apply and get these loans.

Faster Approval

There is very basic paperwork compared to mortgages or secured loans from banks. No evaluation of assets is required either. Hence processing is quicker – money can land in your account in 72 hours in many cases. Even people with past repayment problems stand a chance.

Flexibility

These loans allow a lot of flexibility due to no collateral rules. You can borrow smaller amounts, ranging from £2,000 to £25,000, for many short-term needs. Uses include medical bills, small home renovations, school fees, business costs, etc.

Cons of Unsecured Loans

Here are the cons:

Credit Checks

Lenders do study credit history closely. Too many unpaid bills or defaults can mean rejection or a lesser loan amount. Having no credit history also poses problems much like bad credit – you remain an unknown quantity.

Higher Interest

Without security deposit, lenders see higher risk in unsecured loans. To offset that, they levy rather high interest rates – often 2 to 3 times more than home or auto loans. So you pay more while borrowing.

Refinancing Tough

If failing to repay on time due to circumstances, refinancing or revision of loan terms becomes difficult. With no assets pledged, lenders have little flexibility to give you second chances.

Conclusion

An unsecured personal loan is one of the easiest and fastest to get approved for since eligibility does not depend on any asset. It is given on the basis of your creditworthiness alone. Personal loans can meet all short-term funding needs, from debt consolidation to emergency medical needs, weddings, or home renovation.

Bad credit need not come in the way of getting an unsecured loan today thanks to fintech lenders focused on risk analysis beyond just scores. Stable employment, education and use of alternate data enable approval. Unsecured personal loans are the most flexible in meeting urgent funding needs. Using an online loan platform can further ease and hasten the process.