An unsecured loan is a personal loan, where the lender cannot lay claim on any of the borrower’s belongings, in case they fail to repay. Instead, the lender is relying solely on the ability of a borrower to meet their loan borrowing repayments. Usually, the lender has build a relationship of trust with the borrower. Either through previous loans or through credit history and personal financial situation of the borrower.

Because you are not securing the money you are borrowing, lenders tend to limit the value of unsecured loans compared loans with security. The repayment period is shorter, compared to secure loans, and will, normally, range from anywhere between six months and ten years. Unsecured loans are offered by traditional financial institutions like building societies and banks, but also recently by the larger supermarkets chains.

An unsecured loan can be used for almost anything - a luxury holiday, a new car, a wedding, or home improvements.

An unsecured loan is good for people who are not homeowners and cannot use their property to obtain a secured loan; e.g. a tenant living in rented accommodation. There are a few things to consider before applying for an unsecured loan: Unsecured loans are invariably more expensive than secured loans, and the repayment periods demanded by lenders are shorter too. This is because they have no guarantee that you can repay the loan, and therefore charge you more in interest to cover the cost of insurance policies that they need to take out to protect them should you default on repayments. In the event that a borrower does not pay up, the lender will invoke the terms of the legally-binding credit agreement. His only way to claim the money is through the legal system.

Lenders are obliged by law to tell you how much they charge for this type of finance and this is worked out as an annual percentage rate (APR). Ask whether the APR figure quoted is 'typical' or is what every applicant is charged. You should also investigate whether the interest rate charged is fixed for the lifetime of the loan repayment period, or whether it varies with the base rate. Check too on whether there are early repayment penalties.

Unsecured loans vary from lender to lender, so it pays to shop around before making a final decision.

Karin Boode is the founder of the Loan Info Center, who strives to provide valuable information regarding any type of loan via the http://www.loan-infocenter.com website.

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