Why choose an unsecured loan? An unsecured loan can be used for almost anything - a relaxing holiday, a new car, a wedding, debt consolidation or home improvements. These are just some of the reasons why people choose an unsecured loan.

If you want to raise money for most purposes but do not want to offer your home as security then an unsecured loan could be the solution.

For an unsecured loan the amount and period you can borrow varies. Lenders offer loans even as small as £500 and can go up to £25,000. The repayment period can be anywhere between six months to ten years.

Unsecured loans are offered by banks, building societies and also by the larger supermarkets chains.

Whatever you need it for there are a few things to consider before applying for an unsecured loan.

With an unsecured loan, the lender has no claim on any particular asset. Unsecured lending is generally more risky than secured lending, which is reflected in the relative rates of interest.

An unsecured loan is actually a loan where the lender has no claim on a homeowner's property in case the person fails to repay. The lender is solely relying on the ability of the borrower to meet their loan borrowing repayments.

With an unsecured loan, you're not borrowing against the value of your house. You will usually be offered an interest rate based on your circumstances and the amount you want to borrow. This means that the 'typical' interest advertised might not be the rate you are offered - your rate will depend on your credit rating.

If the borrower defaults on an unsecured loan the lender cannot repossess the goods, but has to resort to other legal remedies to recover the capital, interest and costs.

You should usually borrow as little as possible, and draw up a budget plan to determine how much you need. An unsecured loan might not offer a particularly high amount, so if you're a homeowner and need to borrow more, you could look into secured loans.

Unsecured loans are invariably more expensive than secured loans because the lenders 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 and pursue the borrower 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.

Check whether there is an early repayment penalty.

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About the Author
John Mussi is the founder of Direct Online Loans who help UK homeowners find the best available loans via the www.directonlineloans.co.uk website.