What Is an Unsecured Loan?

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.

Unsecured Loan

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”