Monday, 10 March 2014

Should I take out an unsecured loan?

This matter will be largely defined by the amount of money you need to borrow and by the fact if you have any assets that you can secure your loan with.

Banks will not give large loans if they cannot secure them in some way. Unsecured loans can go up to £25.000, but even that figure is hard to reach, as it is reserved for those with impeccable credit scores.
On the other hand, if the bank can take some collateral, it will be willing to loan much larger sums of money even to individuals with bad credit scores, because they cannot end up short.

However, if you need a smaller amount of money and you do not have an asset to secure the loan, or you do not wish to use it for that purpose, an unsecured loan might be just the thing for you.

Cost effectiveness of unsecured loans
Unsecured loans are not cost effective. They tend to have much higher interest rates than secured loans. Of course, different banks provide different deals, but still, for unsecured loans, interest rates tend to be pretty steep. I advise utmost caution in taking out loans of this kind. Usually, the easier the procedure - the steeper the interest rate. Luckily, the law in the UK says that the money lender needs to clearly show and advertise the APR (annual percentage rate), so that is the first number you should look at. For some loans, like payday loans, interest rates can come up to 5800%! That’s legalised loansharking if you ask me!

Such loans are advertised everywhere (no wonder, since they have such phenomenal profits), they are easy to get, and seem like an obvious first choice. Banks that have much more reasonable interest rates are generally not interested in small amounts or short term loans, therefore you either cannot get them at a bank, or the procedure is disproportionately long.

Payday money landers have protested against the law that forces them to advertise their APR’s, saying that those are short term loans and that no one pays them for a year, so the rule of showing annual percentage should not apply to them. But this is not exactly true, right?

If you cannot wait for your next payday, if you have spent your money in advance, then the chances are that it will happen to you again and again, since you are at least one payment in arrears. So you end up taking out payday loans from month to month, and the money lender gets his annual profit, as it is shown in the advertisement.

If you really need to take out a short term loan for a smaller amount of money, please make an effort to take out a loan with a reasonable APR.

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