If you’ve got a big purchase to make then, chances are, you need to make an important decision about how to fund it. Very few of us are blessed with a bottomless pit of cash to pay for a car, home, holiday, wedding or emergency spend and so we need to search out the most sensible option to pay for these.
Making the wrong choice could well saddle you with a big debt and leave you paying back much more than the quoted cost of the item over a long number of years. It’s important to pick the right option to not only avoid this but to also ensure that you don’t jeopardise your chances of making further purchases when necessary in the future.
So, how about an unsecured loan? Is that the solution?
What is an unsecured loan?
With any form of finance, it’s vital that you understand exactly what it is before you proceed. Don’t feel that ‘unsecured’ loans are unsafe. The name refers to the fact that they do not require an asset to be put up by way of security. So a secured loan, by contrast, would be taken out using your house or car as equity.
Instead, unsecured loans are based solely on your ability to make the repayments, with a judgement made on your credit history and ability to pay.
What are unsecured loans good for?
These sorts of loans are, clearly, good for anyone who doesn’t have an asset to use as equity, particularly people who are not homeowners.
This type of financial product is used in a whole host of ways, with lenders typically prepared to part with up to £25,000 – depending on the circumstances of the applicant.
The interest rate, repayments, fees and charges will all differ depending on the lender.
Examples of lenders that offer unsecured loans include Sainsbury, AvantCredit and Onstride.
What other options are available?
One of the most common alternatives to an unsecured loan is a credit card. These typically carry a smaller spending limit of about £5,000.
However, as Confused points out, it is possible to benefit from an interest free period in which to pay off an initial spend – something that doesn’t happen with a loan.
If you are ‘only’ spending a couple of thousand pounds and can pay this off in a year or two, then this makes credit cards a more attractive option.
On top of that, peer-to-peer websites, as Which outlines, match up saver and borrowers and can provide a better interest rate for borrowers. That benefit is offset by the fact that these loans carry a greater risk.
People buying cars will often consider a ‘hire purchase’. This is the finance package offered by a dealer, in which you pay a deposit and then instalments to pay for your vehicle.
Payday loans have become common in the UK in recent times and provide a short, sharp burst of cash to tide someone over. These typically carry very high interest rates on the expectation that they will be paid back in full in the short term.
Finally, there’s also the tried and tested ‘bank of mum and dad’. Borrowing from your relatives can get you favorable terms but it is reliant on them being able to free up the funds you need and can cause tension if not set out properly.
If you need more than £5,000 and want to pay this back over a period of up to five years then an unsecured loan is probably best for you. Other forms of finance are typically for smaller amounts of money and for a shorter period of time.