Best Unsecured Loans

Read on to find out more.

Updated: March 27, 2024
Matt Crabtree

Written By

Matt Crabtree

Rebecca Goodman

Edited By

Rebecca Goodman

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There are lots of reasons why you might need to take out a loan, whether it’s to finance a goal, or simply to cover various unplanned expenses, many people turn to the banks for a quick cash injection.

There’s a couple different types of loans you can take out from a bank, but by far the two most popular options are secured and unsecured loans.

The former option typically requires some sort of collateral from you as a deposit, such as a house or a car. In contrast, the latter option doesn’t require any form of deposit, which naturally makes them pretty popular among most borrowers.

The question remains though — with all these different options available for borrowers, how can you possibly choose which is the best unsecured loan option for you?

In this article, we’ll be breaking down exactly what unsecured loans are and what makes them such a popular choice over any other kind of loan.

In addition, we’ll also be taking a look at the different variables you’ll want to consider when deciding which option to choose. This includes factoring in your credit score, the various interest rates you’d typically expect, and all the sneaky fees that come along with it too.

Understanding credit scores

So you’ve come to the decision of taking out an unsecured loan. All things considered, including interest and fees, a loan can be a useful tool – if you can afford to pay it back on time.

Your credit score is a key factor used by the banks and other kinds of lenders to determine your creditworthiness, which basically means how likely you’ll be to pay it back on time and without any extra hassle.

In this part of the article, we’ll be focusing entirely on credit scores, including how they get calculated and why they actually matter when you’re trying to obtain an unsecured loan.

What are credit scores?

Put simply, these are a three-digit number that takes lots of factors into consideration, including your credit history, to work out your total creditworthiness.

Essentially, credit scores are just a measure of how responsible you’ve been with your credit in the past, and how likely you’ll be to repay your debts back to the lender when you need to.

These scores range from around 300 to 850, and the higher the number that you’ve got attached to your name, the more banks will trust you with loans.

How are credit scores calculated?

There’s actually a few different types of credit scoring models that are used by the banks, but by far the most common model is the FICO score. This score is made up of five main factors, each with their own significance. Let's take a closer look at each of them:

Payment History

This is the largest and most significant factor that the banks look at when assessing your credit history. As the name suggests, it’s a measure of how frequently you pay bills back on time. Obviously that’s a fairly important factor as far as the banks are concerned, which is why it accounts for 35% of your total credit score.

Amounts owed

Next up is the total amount you actually owe in comparison to the amount of credit you currently have available. So if you've currently got no outstanding debt, this factor is brushed over fairly quickly.

However, if you're on the other side of this equation, then it raises a few red flags for the lenders, which is why this factor makes up 30% of the final score you're left with.

Length of credit history

Compared to the two main factors mentioned above, this is a slightly less significant variable, making up only 15% of your total credit file. The length of your credit history is simply referring to how long you’ve had various different types of credit accounts opened.

If you’ve had an account opened for a while, it’s generally considered a positive thing by the banks, as it can demonstrate that you’ve got a proven track record of managing your credit responsibly over the years.

The banks can learn a lot from this factor, as it’ll piece together on a timeline how consistently you make payments, and if you’ve ever done anything in the past like maxing out your available credit limit.

Credit mix

Similarly to credit history, lenders like to take a look at this to learn more about your relationship with credit over the years. This factor basically accounts for all the different credit accounts you have, not just credit cards.

Think of things you may have taken out in the past like auto loans and mortgages — these all demonstrate to the bank what your current financial status may be like and if they want to get involved with someone who already has a bunch of different debt responsibilities.

New credit

The last factor that the banks take into consideration is how many other new credit accounts you’ve recently opened. When a bank sees you rushing around to check credit ratings and apply for lots of new loans, it implicitly suggests that you might be a bit desperate for the cash and aren’t in a particularly stable financial situation.

This might feel slightly harsh as you’re only trying to make proactive steps to improve your current status, but this still makes up the final 10% of your final three digit score.

Why do credit scores matter?

In a nutshell, when you're taking out an unsecured loan (like credit cards or a personal loan), you're not providing the banks with any collateral like you would be doing for a secured loan.

Because of this, the lenders are taking on a much higher risk by giving you the money as they have no kind of insurance in the event that you can’t pay it back on time. This means they have to rely heavily on whatever your creditworthiness is instead, as this’ll provide them with a bit of solace as to whether or not you’ll give them any issues.

Generally speaking, you’re going to have a bit more trouble trying to receive an unsecured loan if you’ve already got quite poor credit history, which is why many people opt for a secured loan in this situation instead.

That’s not to say that it’s impossible to receive an unsecured loan if you don’t have an impeccable credit rating, it just means that you have fewer options available to you and you might actually be given a higher interest rate to compensate for the increased risk you pose.

Tips for improving your credit score

There are still a few ways you can boost your credit score, but it won't happen overnight.

Paying bills on time

Now this may sound like an obvious one, but as discussed earlier, payment history is the most significant factor in your total credit score, making up over a third of the final figure. Make sure you’re keeping on top of this every month.

Keep credit card balances low

When you successfully sign up for a credit card, the lender will always give you a total credit limit that represents the amount of capital you have available to borrow. While you’re given this total figure, it’s actually a bit of a trap to catch people out.

Remember, credit utilisation makes up 30% of your credit rating, so only aim to use around a third of however much credit you’ve been allotted to keep credit balances down.

Check your credit report for errors

While it’s ultimately up to you to provide accurate and up-to-date information to the bank during your application process, there’s still times where they might get things wrong and have incorrect information attached to your name.

This is one of the simplest ways you can improve your credit rating, so make sure all the data on your report is correct and dispute any errors you might find.

Avoid opening too many new accounts

We’ve touched on this earlier, but it can seriously impact your credit score for the worse if you’re spotted opening a bunch of different accounts in a frenzy. Just make sure you’re giving it ample time before seeking to start any new applications for credit.

Join the electoral roll

It's free to join the electoral roll and it allows you to vote – but it also gives your credit score a boost as it allows lenders to check your name and address to prevent fraud.

Choosing the right lender

So, we’ve gone over credit scores and the huge impact they have on your chances of securing personal loans, but now it’s time to go over the importance of choosing the right lender for your requirements.

We touched on this earlier, but there’s plenty of scammers out there looking to prey on those who aren’t particularly credit-savvy, so it’s vital to know what you’re looking for when applying for an unsecured personal loan.

Aside from all the scamming, it’s generally just a good idea to know who’s got the best terms and rates available, so never just rush to the first bank you can think of.

Why comparing lenders is important

When it comes to calculating the total cost of your loan, picking the right lender can make all the difference.

You’ll typically find that the interest rates, fees and repayment terms all vary quite drastically between different banks, so failing to research and compare loans could cause you to end up with unnecessarily high fees over the life of the loan.

In addition, you’ve always got to watch out for the sneaky, almost predatory practices that lenders like to engage in. Things like excessively high interest rates or using hidden fees to force borrowers into an unrelenting cycle of debt.

By checking out all your different options beforehand, you can save on a lot of the drama and prevent yourself falling victim to these tricks.

Tips for finding reputable lenders

Here’s a few pointers to assist you when doing your due diligence:

Check the lenders reputation

It’s not enough to simply take their word for it — every bank claims to offer the greatest APR (annual percentage rate) and minimal fees because they’re ultimately trying to make money off of you.

Make sure you’re looking at reviews and ratings from previous borrowers to get an idea of their actual value of service.

Verify the lenders credentials

Whether it’s a bank or any other kind of lender, always steer clear of suspicious offers or promises that seem far too good to be true. Ensure that whoever you end up choosing is either an established reputable lender, or at the very least that they’re licenced as a business with the Financial Conduct Authority (FCA).

Compare interest rates and fees

Never settle on the first option that jumps out to you when looking at different lenders. Always compare the loan rates, fees, and any other variables to ensure you’re getting the best possible terms.

If you use an online loan comparison tool, it can simplify the whole process, but just make sure you read the small print.

Benefits of online loan comparison tools

To give you a hand with the plethora of lenders out there, loan comparison tools are all over the internet. As the name suggests, these are websites that compare and compile all the different options in the market based on whatever filters you provide.

This works almost identically to other comparison tools you may have used in the past, like flight or property price comparison websites.

In this part of the article, we’ll be going over why you should consider using something like this to find the best possible deal you can.

Convenience and speed

It goes without saying that using one website to consolidate all of the available lenders is a lot more efficient than having to check them all manually and make up some sort of spreadsheet to see them together.

Many people feel the need to visit each bank or lender in person to discuss terms rather than just doing it online, which is a huge waste of time. However, In just a few clicks, these websites allow you to easily compare different loan offers without even having to leave your home!

Comprehensive comparisons

These websites don’t just give you a simple ‘good’ or ‘bad’ description when they’re comparing lenders; you’ll often get a detailed list of factors comparing the terms for loan repayments/monthly repayments, interest rates, and other little details that are conducive to a good lender.

This means you can use data to effortlessly differentiate the pros and cons of each loan offer so you can make a better informed decision.

Easy process

Sometimes, depending on the website you use, these comparison tools even let you apply for unsecured/secured loans directly through their platform. This streamlines the whole application process, making it quick and easy to complete and eliminating the need to take time out of your day to visit branches in person.

Comparing rates and fees

To round things off, we’ll be taking a closer look at how you can compare all the various rates and fees from different lenders, as well as pointing out the most infamous of fees that you can expect to run into.

In addition, it’s paramount that you understand the distinction between fees and interest rates. Both of these have significant impacts on the overall cost of whatever loan you’re taking out, and they never seem to stay the same from one lender to another.

Interest rates v. fees

Interest rates are just a percentage of the total amount you’ve loaned that you’ll have to pay back to the lender on top of the principal (the amount of money you borrowed).

You’ll normally see the phrase ‘annual percentage rate’ (APR) thrown about when you read the terms banks are offering, and this is basically just a reference to the percentage of interest you’ll pay each year.

On the other hand, fees are slightly different. These focus more on additional charges that are either added on top of the principle or deducted from the loan proceeds from the beginning. You’d typically never exact the exact same charges between lenders, and many of them can actually be avoided if you’re careful.

For example, as you might’ve guessed, early repayment charges are applied when you repay the loan early, so it’s crucial you’re only making a loan repayment in the allotted slot they provide for you.

Conversely, late fees are applied if you go over this slot, so the same course of action applies here too.

The total cost of your loan is determined by both the interest rates and fees that are associated with it, so suffice to say it’s worth shopping around to try and minimise both these factors and get yourself the best loan deal.

Examples of common fees

You can typically expect quite the range in fees when you’re taking out a bad credit personal loan:

Origination fees

These are fees that get applied by lenders for simply processing the loan application in the first place. It can range from around 1-5% of the total amount you're lending, so make sure you can handle this before applying for any kind of loan, be it guarantor loans or a homeowner loan.

NSF Fees

Standing for ‘non-sufficient funds’, this charge is applied sometimes if a payment bounces due to an insufficient amount of funds in your account.

Prepayment penalties

Some lenders charge a fee when you pay off the loan prior to the end of the term.

Late fees

If you miss a payment, some lenders may charge a late fee.

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