Bad-credit-friendly firms may still be able to offer the funds you need on flexible repayment terms

If you’re in need of quick access to funds but don’t have assets like a car or home to use as security, unsecured loans could be the right solution for you. These types of loans are particularly beneficial for people with poor credit histories who may not have the option of providing collateral. 

What Is an Unsecured Loan?

An unsecured loan is a type of loan where you don’t have to provide any collateral (like a car or house) to back up the loan. Because there’s no collateral involved, lenders assess your creditworthiness by looking at factors like your income, credit score, and ability to repay.

Since the lender takes on more risk by offering loans with security if the borrower defaults,  interest rates tend to be higher than secured loans, such as pawnbroker loans or logbook loans.

Faster Decisions and Fund Access

One of the key benefits of an unsecured loan is that it typically comes with a faster decision process. There’s no need for asset valuations or legal processes, so lenders can approve your loan more quickly—often within hours or a few days. 

How Your Credit Score Affects Your Loan

Your credit score plays a significant role in determining whether you’ll be approved for an unsecured loan, and the interest rate you’re offered. Unsecured loans are still an option for those with poor credit, but it’s important to be realistic about the rates and amounts you might qualify for. Lenders view unsecured loans for poor credit borrowers as higher risk, which often means higher interest rates and lower loan amounts.

However, there are lenders who specialise in bad credit loans and are more lenient with their criteria. While you may face higher costs, this can still be a useful option if you need access to funds quickly and don’t have collateral to offer.

Income Verification and Affordability

Even though unsecured loans don’t require collateral, lenders will still need to verify that you can afford to repay the loan. This means you’ll need to provide proof of income, whether through employment, self-employment, or benefits like Universal Credit. It’s essential to be upfront about your financial situation so you’re not over-committing to something that could lead to missed payments and further financial stress.

Shorter Terms, More Flexibility

Unsecured loans tend to offer shorter repayment periods than secured loans, usually between 12 and 36 months. This means you’ll pay off the loan relatively quickly compared to a mortgage or a car loan. If you prefer not to have a long-term financial commitment hanging over you, this could be an ideal solution.

For those with poor credit, it’s important to choose a loan term and monthly repayment that works within your budget. While the flexibility is a benefit, ensure that the repayments are manageable, as missed payments could negatively impact your credit score further.

Lower Loan Amounts

Due to the increased risk to lenders, the amount you can borrow with an unsecured loan may be lower than with a secured loan. This is especially true if your credit score is less than perfect. 

If you’re looking for a large loan, you might find it more challenging to be approved for the full amount through an unsecured option. However, unsecured loans are still suitable for smaller borrowing needs, such as covering emergency expenses, consolidating smaller debts, or financing a significant purchase.

What Happens If You Miss a Payment?

Unlike secured loans, you won’t risk losing property like your car or home if you miss payments on an unsecured loan. However, this doesn’t mean there are no consequences.

Missed or late payments can seriously damage your credit score, making it harder for you to borrow in the future. Lenders may also charge penalty fees, which can increase your overall debt burden.

If you anticipate struggling to make a repayment, it’s best to contact your lender as soon as possible to explore alternative arrangements.

Debt Consolidation Opportunities

Unsecured loans can be a good option for consolidating smaller debts. If you have multiple loans or credit card debts with high interest rates, you can use an unsecured loan to combine them into a single monthly repayment. This simplifies your finances and can even reduce your overall interest, depending on the loan terms. However, make sure you understand the total cost of the loan and ensure that consolidating your debts won’t result in higher payments overall.

Guarantor Loans: An Alternative to Consider

If you’re struggling to get approved for an unsecured loan due to your credit score, guarantor loans could be an alternative option. With a guarantor loan, a trusted friend or family member with better credit co-signs the loan, agreeing to take on the repayments if you’re unable to make them. This can increase your chances of approval and may result in better interest rates, even if your credit history is terrible.