It is not uncommon for many people to require short term, unsecured loans at one time or another to cover unexpected expenses and financial emergencies.
Navigating one’s way however, through the numerous types of unsecured short term loans in the UK market poses a different challenge altogether and there are many types of unsecured personal loans to choose from (source: MoneyBoat).
Selecting the right loan for your circumstances could make all the difference and get you out of a financial rut. Knowing what types of loans are available in the first place allow you as the borrower to be far better informed and educated, to make more suitable financial choices which will help the borrower work towards a far brighter financial future.
What is an Unsecured Loan?
As unsecured loan is a loan which is provided by a lender to another party; the borrower, not secured against any asset or item as security. There will be a contractual agreement with terms that need to be abided by for both the lender and the borrower. If the borrower fails to meet their contractual obligations and repayments, their credit rating will be tarnished and they may well face legal and court proceedings as a result.
How do Secured Loans Work?
Conversely, in the case of secured loans, an asset is used as collateral on the loan. Therefore, if the borrower defaults on payments, the lender may seize that asset and use it to then recoup their costs.
For example, mortgages are the most popular type of secured loan in the UK. the premise of mortgages is that the borrower acquires a large loan, for example £250,000. In order to qualify for the mortgage loan, they must own enough equity to cover that value, so if they own £500,000 worth of equity in their property, a lender may well provide them with a smaller amount, secured against the necessary amount of equity.
Payday loans are perhaps the best-known type of short term unsecured personal finance in the UK and are used by many households in the short term as part of a wider financial planning strategy, considering household finances and financial practices.
These loans are however, designed to last (usually) no longer than 30 days or so, at which time they will require repayment. The borrower simply instructs the lender (for example online) as to how much they wish to borrow and over how long; some lenders allow longer periods than 30 days.
Having been accepted for the loan, the loan then starts accruing interest, with the industry maximum being set by the Financial Conduct Authority (FCA) at 0.8% per day (as of April 2014.) Interest increases cumulatively, considering both the loan capital and additional interest. This means that it is in borrowers’ interest to clear these loans by the repayment date.
These loans are designed to be provided in the short term, for example to help pay for financial emergencies. This may include a boiler or vehicle breakdown or perhaps severe damage to one’s property. Termed ‘payday’ loans, they are supposed to be repaid on or around the payday of the borrower. The loan will usually be repaid in one go as a single lump sum, covering both loan capital and interest.
Modern Day Short Term Loans
Nowadays, although many people do still favour traditional payday loans, there has been increased demand for loans which spread out their repayments over longer periods of time. For example, rather than having to make all the necessary payments; loan capital and interest in one go, borrowers are often favouring an instalment-type of product.
This works by a borrower taking out the loan as they would for a payday loan. However, rather than the full, balancing payment having to be made at the end of a month, around payday, numerous payments are made over a pre-arranged timeframe.
For example, a borrower may apply for a loan with which they make their repayments in 3 payments spread out over as many months. This makes the repayments that bit more manageable and affordable than a loan which required payment at the end of a single term.