What are Unsecured Loans?
Unsecured loans are a short term credit option made available from a direct lender. They are also commonly known as payday loans because customers are typically required to repay the loan by their next payday. However, some direct lenders offer instalment plans that can extend the loan over several months. Payday lenders make it easy for borrowers to qualify and because of this, a growing number of people in the UK are turning to unsecured loans for emergency credit.
In fact, well over a million people take out unsecured loans in the UK every year, many of these people taking out more than one.
Are unsecured loans legal in the UK?
To answer the question: Yes. According to British law, unsecured payday loans are completely legal in the UK. They can in fact sometimes be a helpful source of emergency cash. Direct lenders are subject to strict restrictions that are designed to protect consumers from predatory lending practices.
Short term lending in the UK has been regulated for the past few years by the Financial Conduct Authority, or FCA.
After investigating the current practices in 2013, the FCA established some stricter guidelines for payday loan direct lenders. Specifically, lenders have to limit their daily interest rate to 0.8% or below.
They can charge no more than £24 per £100 loan and they cannot require borrowers to repay more than double the original loan amount. Interestingly, respecting their customers best interests Moneyboat lowered their percentage further to 0.7% per day.
These new guidelines has increased consumer trust in direct lenders. It has also minimised the potential for abusive lending and limited the snowballing of debt typically revolved around unsecured loans.
How Do Payday Loans Work?
The typical payday loan or customer looking for a bad credit loan begins by filling out an application online. The lender will ask for some personal information including the customer’s name, address, phone number, monthly expenses, bank account number, place of employment, and monthly income.
In order to qualify for most short-term loans, the borrower should have a verifiable minimum monthly income and he or she should also be over the age of 18.
Once the loan is approved (usually a quick process), the money is deposited directly into the recipient’s bank account. The first payment is typically due within a month of the loan and it is debited from the customer’s account.
Some payday loans are due in full on the customer’s next payday, while other direct lenders such as Moneyboat offer instalment plans for anywhere from two to six months.
What is the average unsecured loan?
The people who are most likely to turn to unsecured loans are those who can’t easily get credit elsewhere hence the name often used, bad credit loans. They may be young, with no credit history, or they may have a bad credit rating due to a history of financial problems.
Whilst most direct lenders do check credit scores and verify income, they are still much more lenient than a bank.
According to recent statistics, the majority of customers in the UK considering unsecured loans are under the age of 35, single, employed or seeking employment, renters, and earning less than £1500 per month.
The average borrower takes out 6 loans in a year with an average loan amount of £260. The most common loan amount is £100.
Why Do People Need Short Term Loans?
Most often, people turn to short term lenders because they have faced an unexpected change in circumstances. In a slight majority of cases, the borrower’s expenses have gone up. This might mean an increase in rent, or a sudden need for a car repair in order to get to work.
Many other bad credit loans are borrowed because of loss of income. This may be due to a job loss or a decrease in hours at work.
What are people using unsecured loans for?
More than half of all UK borrowers take out short term loans to cover basic recurring expenses like rent, utilities, or food. In fact, paying for housing costs is the number one reason for getting a short-term loan. That being said, at Moneyboat we discourage using short term unsecured loans for this reason and would only recommend considering the option if the cash is needed for a real emergency.
According to a recent report, the number of payday loans taken out to cover rent or a mortgage has doubled over the past two years. A small percentage of customers take out a loan in order to pay off an existing debt. Other common reasons given by borrowers are needing to pay for car expenses, like repairs or petrol, and buying emergency household items.
Very few borrowers use the money for non-essential purchases, like a holiday or a new phone, as this is seriously discouraged by any reliable direct lender.
What are the Risks of taking out an unsecured loan?
An unsecured loan should never be a customer’s first resort. The interest charged by payday lenders is significantly higher than bank interest rates. Moreover, the charges for late repayments or for renewing a bad credit loan are steep. Unfortunately, some borrowers find themselves borrowing money to pay off debts and lacking funds to cover basic necessities.
Ideally, no one should borrow money if they aren’t sure they’ll be able to repay within the payment period. But life is not always predictable, even with careful planning. A short-term loan could become a burdensome debt.
When Is An Unsecured Loan A Good Idea?
Payday loans fill a need that traditional lenders don’t meet. Banks can make it so hard to qualify for a loan that the only people who can borrow money are those who don’t really need it. However, when someone faces an emergency, a payday loan can be a life-saving solution.
When the need for cash is truly an emergency, a payday loan may be worth the risk. In many cases, short term loans have enabled people to get a car repaired and get back to work or cover a necessary medical expense.
Should I avoid short term loans?
In general, it’s a bad idea to take out one short term loan in order to pay off another loan. This often leads to a debt spiral that the borrower cannot escape from. Borrowers who are already paying off one short-term loan should not take another until the first is paid off.
In addition, people who want extra money in order to afford luxuries, like a plane ticket or new brand-name clothes, should not consider this type of loan. A payday, bad credit loan would be best used for needs, not non-essential wants.
What are the alternatives to an unsecured loan?
The first thing to do before taking out an unsecured loan is to try to negotiate better terms with a creditor. In some cases, a utility company, landlord, or mortgage lender will agree to an extended payment plan rather than lose a customer or have a borrower default on a payment.
If that doesn’t work, there may be charities or community lenders that help people get enough money to keep the lights on, for example, or make one more car payment.
Friends and family members may also be willing to help out, but it’s a good idea to get the terms of a personal loan in writing. Failing to pay off a personal debt can cause a permanent rift in a relationship.
Finally, borrowers should not give up on traditional financing without even trying. An arranged bank overdraft can be a lower-cost option for some, while others find that a credit card loan may be less expensive than a payday loan. It’s best to investigate all of the possibilities.
Borrowing tips for payday loan customers
- Borrowers who decide to apply for an unsecured payday loan should make sure that they have exhausted other options. Only when the need is truly an emergency, a high-interest payday loan might be worth the risk.
- Borrowers should always make sure to rule out other solutions or sources of funds before taking out a payday loan.
- It’s important to compare bad credit loans to find the most affordable option. There are websites that compare many different direct lenders and show users how much they will end up repaying according to each company’s terms.
- Understand the total repayment amount based on the interest rate and loan period. This information will help you decide if an unsecured payday loan is truly affordable.
- Create a realistic payback plan for repaying the loan. Make sure to prioritise those payments in order to avoid late charges.
Often, payday loan customers who are dealing with a crisis feel overwhelmed by loan repayment. Help is available from debt advice services in the UK and careful advance planning can help avoid more serious financial problems later on.
Why Borrow From Moneyboat.co.uk?
Moneyboat is a direct lender that offers a clear and simple process with multiple affordable loan options. Their friendly underwriting staff work with each client individually.
Each customer is approved a loan that best meets their needs and poses the least risk. They make sure that the customer is aware of the costs of the loan and is prepared to meet them.
With an interest rate of 0.7% MoneyBoat loans are less expensive than those of most direct payday lenders. Moneyboat charges no additional or hidden fees.
Their instalment loans can help clients weather a storm until their circumstances change for the better.
For more info please check your eligibility here.