Compare Unsecured Loans

How to Choose an Unsecured Loan

If you’re considering taking out an unsecured personal loan, you’re probably trying to decide which type is right for you. Although secured loans are an option for those who have equity in their home and are willing to use it as security, unsecured loans are more common and carry less risk to the borrower.

There are a number of different types of unsecured loan and loan amounts; terms and costs will differ from lender to lender. At NerdWallet, it’s our goal to keep consumers informed about their personal finances. We want to help you understand your options a little better that’s why we’ve created the unsecured loans comparison table and information guide below.

Choosing the right type of unsecured loan

Deciding that you want to take out an unsecured loan is the easy bit. With more choice than ever before for borrowers, navigating the marketplace can be slightly overwhelming. You’ve probably got questions like: what’s the best value loan? How much time do I need to repay the loan? And will I be eligible if I apply?

These are all very valid questions and they can all be answered with just a little research. Luckily there are some fantastic online research tools available to borrowers, and lenders must also stick to strict rules put in place to prevent borrowers taking loans that they can’t afford to repay.

Let’s start with learning a little about the main types of unsecured loan.

Remember that interest rates and lending criteria differs between lenders.

Types of unsecured loan

• Personal bank loans: High street banks are still a major source of personal unsecured loans, but they tend to have strict lending criteria.

• Personal loans with alternative lenders: Online-only challenger banks offer loans that sometimes have more flexible criteria and terms than traditional bank loans. You can sometimes secure a loan even with poor credit, if a lender will accept the assurances of a guarantor who will repay the debt if you are unable.

• Short-term loans: If you need quick access to a relatively small amount of cash, a short-term loan may come in useful, although interest rates can be on the high side. Ultra-short-term loans, often known as payday loans, can come with very high interest rates and are usually repayable in a single payment.

• Peer-to-peer: Peer-to-peer lenders are matched with borrowers through dedicated online platforms. Interest rates can be favourable, but lending criteria tends to be quite strict.

Comparing unsecured loans

Once you have a better understanding of the type of loan that will suit your requirements, it’s time to start comparing lenders to find a product that looks right for you. Finding the right loan is a case of identifying the choice which provides you with the right amount of money and has repayment terms which will suit you.

It’s about assessing your priorities. You may want to prioritise repaying your loan quickly to minimise the amount of interest you will end up paying on the whole debt. Alternatively, you might need to spread the repayments out over as long a timeframe as possible to make them more affordable, which can lead to a much lower monthly outlay, but will probably cost you more in interest in the long run.

A simple way to compare the cost of an unsecured loan, as a percentage of the total loan amount over the course of an entire year, is the annual percentage rate (APR). Lenders must display their APR by law but note that ‘representative APR’ means that around half of applicants were offered the interest rate displayed, and that you could pay more if your credit history isn’t strong enough.

Choosing an unsecured loan FAQs