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Unsecured loans: a good thing for the borrower or the lender?

Last Edit: 22/08/18

While the term "unsecured loan" may not sounds appealing -- it is sometimes referred to as a personal loan -- it is usually the preferable option for borrowers because 'unsecured' means the loan is not tied to a borrowers home or assets. Therefore, if the borrower cannot repay an unsecured loan, they will not be forced to sell their home or assets to repay the loan.

The alternative option to an unsecured loan is a secured loan: which is usually secured against a property (house, bungalow, apartment, land), and does give the lender the option/power to repossess the property if the borrower cannot repay the balance.

The other typical advantage to unsecured loans is that they are fixed: which means the borrowers knows the exact amount of money they will need to repay over a set period of time. The alternative is a variable rate -- usually associated with secured loans -- which means the loan repayment rate can be changed when the lender wishes.

Do to the risk involved for lenders, unsecured loans tend to be for a relatively low amount: between £1000-£10,000, with a repayment period of 1-3 years. Therefore, if a borrower borrowed £10,000 over three years, they would know that they would owe the following -- assuming the borrowing rate was 5.1% -- which can be found as of January,2013.

Update 2018: Unsecured loans provided by established 'respected' financial establishments -- think Sainbury's Bank, M&S Bank, Yorkshire Bank, Clydesdale Bank, HSBC, Hitachi, Tesco Bank, theAA, RBS, Natwest, Post Office -- currently have a representative APR ranging from 2.7%-3.6%. This level of APR means that if a borrower borrowed £7500 (at 2.7%) over 3 years, they would repay in the region of £7812 in total when the three years has finished. There are however, loan brokers who can arrange unsecured loans at a much higher representative APR: in the region of 20%. This would result in a borrower repaying over £9500 in total when the three years has finished; a sizeable increase of nearly £2000. Therefore, as a borrower it is essential to read the fineprint of the loan, and shop for the lowest representative APR possible, to ensure the borrower isn't repaying far more than they need to.