What is an unsecured loan?
An unsecured loan is a loan that isn’t secured against something valuable (like a house or flat). So, from the lender’s perspective, it’s riskier than a secured loan. That means they’ll probably charge more interest than they would for a secured loan, and they’re more likely to restrict the maximum loan amount.
Unsecured loans & credit ratings
Before they’ll give someone a loan, lenders are almost certain to do a credit check – they’ll look at the would-be borrower’s credit rating to see how well they’ve repaid loans (and paid bills and generally handled their finances) in the past.
In general, the better their credit rating, the better their chance of getting the loan they’re after, at a good price (i.e. a low interest rate). People with poorer credit ratings may find that lenders won’t give them a loan at all, or will charge them more.
However, reliably making payments to a credit agreement (whether it’s an unsecured loan, a mortgage or even a mobile phone contract) will help someone improve their credit rating.
Unsecured loans & houses
If the borrower doesn’t repay an unsecured loan as agreed, the lender may feel they need to take them to court to get their money back. If the court thinks it’s the best way for the borrower to repay the loan, it would (in most cases) issue them with a County Court Judgment (CCJ).
Although this is usually seen as a last resort, the issuing of a CCJ does mean the lender can then ask the court (if the borrower is a homeowner) to issue a Charging Order, which basically turns an unsecured loan into a secured debt – by securing it against the borrower’s home.
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