Credit can be secured or unsecured, both of which are popular to many borrowers. Many people choose unsecured credit as it doesn’t require having to put your assets, such as a house or a car, on the line to secure the loan. This is perfect for those smaller loans or if you don’t own the sorts of assets secured credit requires.
However, like secured loans, you should remain aware of the potential issues and downsides unsecured loans could bring. We’ve put together some information to help you decide what is best for you and your situation.
What’s the difference between secured and unsecured credit?
Secured credit works by using collateral for the lender to repossess if the borrower fails to repay the amount in the time they agreed they would. This could be your car or even your house. The upside here is because an awful lot is at stake, you can borrow large amounts of money. On average, secured credit loans start from around £10,000 and can go into the millions.
Unsecured credit, on the other hand, has no collateral involved. Instead, the lender will have to rely on consistent credit history checks, trustworthiness and reassuring signs such as being on the electoral register. Lenders see unsecured loans as a much riskier choice, so they may require several criteria before they lend. The additional risk will result in higher interest rates than those seen with secured credit. Unsecured loans are usually much smaller amounts, but can go up to £25,000.
How do you get an unsecured loan?
In order to get an unsecured loan, you will need to do your research. Eligibility is important and you want to be careful your loan doesn’t contribute negatively to your existing credit score.
Expect to provide several documents to prove lenders can trust you to pay back the money you borrow. Unsecured credit is notoriously harder to get but don’t let this put you off completely. If you require a smaller loan and do not want to involve collateral, unsecured loans are the best fit for you. Bear in mind the higher interest rates and make sure you can afford to pay it back, otherwise you’ll be charged extremely high interest rates until you pay it back.
Be aware of the loan’s APR (Annual Percentage Rate) which is often fixed. This will tell you how much you should expect to pay over time for your unsecured loan.
When you come to apply for an unsecured loan, you will also need your standard personal information on hand to proceed. This will include being asked to provide your home addresses over the last few years, employment information, bank account details, and your financial incomings and outgoings.
Is unsecured credit a bad idea?
Any form of borrowing carries many risks. An inability to pay a loan back in time can result in negative credit scores, spiralling debt and legal issues. However, with the correct consideration and planning, unsecured credit can work well. They are especially appealing because they are open to those who are not homeowners, as well as offering flexibility in when and how the borrower wants to pay back.
Unsecured credit may be a bad idea for those with bad credit scores. You will find it hard to be accepted, and if you are, be prepared for high interest rates. It’s even more important to pay your unsecured credit off within the time frame or lenders will add additional charges on top, thus lowering your credit rating even further. However, this won’t be the case if you take out a loan with Salad Money - we don’t impact your credit score at all (as we use open banking) and neither do we charge unethical late fees.
Consider other options too, such as secured credit or credit cards. Form a list of pros and cons for your different options, thinking about how much you want to borrow, what you are willing to do to secure the loan and what you will realistically be able to pay off without undue financial strain.
Secured loans are usually cheaper for the borrower but involve more risk. Whilst unsecured loans will mean you’ll have to pay more interest, you will not have to worry about some of your most precious and expensive possessions being taken away from you. These are both options for those who require money to borrow and can be effective if used correctly.
So whilst the answer may not be that unsecured credit is a wholly bad thing to avoid, you still need to be mindful of the consequences of careless money management. Always make sure you can afford your loan before you take it out.
If you just want a small loan but you’re worried about your credit score or having to pay astronomical interest rates, try Salad Money. We use open banking, so we’ll never need your credit score, and we function as a social enterprise, only offering loans if we think you are able to pay them back.
Which new unsecured credit programs are not regulated by the FCA?
The Financial Conduct Authority (FCA) has not regulated some of the newer unsecured credit programs that have garnered popularity in the last couple of years.
Normally, when we speak of unsecured credit, we think of credit cards and overdrafts. However, the ‘Buy Now Pay Later’ option that you’ll have seen on online shopping checkouts has had an insurgence recently. The likes of Klarna and Clearpay appeal to their customers by not only giving them the opportunity to get what they desire early but also by letting them do so with low or no interest whatsoever - which the FCA does not approve of.
The accessibility of these Buy Now Pay Later systems makes it easy for borrowers to rack up payments with little awareness they are doing so. Consequently, many borrowers find themselves with considerable debt that they aren’t able to pay off.
Another recent, unregulated unsecured credit program to be wary of is ‘salary advance schemes’. Schemes where companies sell their services as a way to get access to your salary earlier, but this is hotly contested. It isn’t completely clear if the money given to the borrower is from the employer or the scheme provider. Either way, nothing here has been properly regulated by the FCA, nor has it been recorded by HMRC, so it’s best to avoid these unregulated bodies.
Although newer arrivals to the unsecured credit market may seem convenient, we still need to remain very careful. This is especially important in the current climate where Buy Now Pay Later schemes are taking advantage of the huge uptick in online shopping during the pandemic.
At Salad Money, we believe in ethical, affordable lending. We’re completely regulated by the FCA and our goal is to give small, fair loans to NHS employees. If we sound like what you need, contact us today.