A loan sanctioned or given only on the basis of the borrower’s financial position, credit worthiness, credit history, and personal reputation, without engaging any collateral is called an unsecured loan. Here borrower signs a promissory note but does not hypothecate any specific asset(s) as collateral security, and so this is also called a signature loan. Since the risk of the lender is high, higher interest rates are attached to such loans.
Some of the most common examples of unsecured loans in UK are personal loans, credit cards, medical bills, and payday loans. Among the above personal loans are the most common. For personal loans and credit cards the banking companies take the general information such as name, social security number, address, and employment information of the borrower along with his place of work and proof of earnings. They consider the option of loaning out a certain amount of money based on the ability to payback.
Medical bills are another form of unsecured loans wherein the hospitals provide care and regarding insurance is provided upfront. However, there are a number of costs that are not covered by the insurance company and the patient party is liable to bear those expenses. A patient party signs an agreement before receiving any care or treatment that they will be responsible for any portion of the bill for which the insurance company does not pay.
Thus in a nutshell any organization, banking or non-banking financial institution issuing loans in UK agrees to loan out to money with the agreement that the second person will pay interest when he/she repays the loan. This type of lending is increasing in popularity, mainly because of the almost complete anonymity.
The element of risk with any loan, whether secured or unsecured always exists. But in case of unsecured loans in UK the risk is more as the individual or an entity seeking the loan might falter payments because of unforeseen reasons like sudden joblessness or death of the principal bread earner, which might lead to a situation wherein the lender might end up walking away with nothing. So it is better to keep in mind that “Don’t loan out money unless you’re prepared to be without it”