An unsecured personal loan is a type of credit that is not backed by any collateral. This means that you don't have to put up assets like your home or car as security for the loan. Instead, lenders will approve unsecured personal loans based on your creditworthiness, which includes factors such as your credit score, income, and financial history. Each finance provider will have its own criteria for approval.
These loans will typically be for amounts under £25,000 over a period of anywhere between one and seven years. You can use your personal loan for various personal expenses. However, you can’t and shouldn’t just do whatever you want with it. There are certain restrictions and limitations. Knowing these limitations will help you stay on the right side of the law and avoid financial trouble. So let’s find out the kinds of things you shouldn’t be relying on a personal loan for.
What is a personal car loan?
It is understood that an unsecured personal loan for a car should be solely used for that purpose – but, unlike a secured loan, your car is not attached to the agreement as collateral. However, if you can't repay your unsecured personal loan, the lender can attempt to recover the debt via court action or a debt collector, which may result in you having to use your car as a means of paying the debt.
A personal loan for illegal activities
Unsurprisingly, using personal loans for illegal activities is a no-no. Lenders in the UK are bound by law to make sure their loans are used for legal purposes only. Those illegal activities can include anything from drug trafficking to money laundering. If you do use the loan for this purpose, you will be risking legal consequences including fines and imprisonment.
A personal loan for gambling
Gambling with money you have taken out as a loan is a dangerous thing to do. You have no guarantee that you will win, and you will still need to continue paying off the loan. Gambling outcomes are unpredictable at best, and if you lose, not only could you rack up significant debt, but you will also potentially harm your credit score and your ability to access credit in the future.
A personal loan to fund investments
In case you are tempted, using a personal loan to invest in the stock market or other investment opportunities, although not illegal, is a bad idea. Investments, as with gambling, come with risks, and there's no guarantee of returns. If your investment fails, you'll still be responsible for repaying the loan, which could leave you in serious financial difficulty.
A personal loan to fund higher education
Although personal loans can be used for different expenses, they may not be the best option for paying undergraduate university tuition. Interest rates on personal loans are often higher than those on student loans. Additionally, student loans often come with specific benefits, such as the ability to defer for a period of time or until you earn a certain threshold. It's usually better to explore dedicated student loans or scholarships to pay for any third-level education.
A personal loan to pay off business expenses
Funding your business expenses like a tax bill with a personal loan should be avoided. If you want to get credit to fund a business expense you should look at options which are designed for business needs, offering better terms and usually tailored to your business circumstances. Personal loans don't provide the same flexibility or advantages. Taking out a personal loan would also mean mixing personal and business finances which can result in accounting and tax issues.
Used appropriately, a personal loan can be a great way of funding an unforeseen expense or investing in house improvements – but you will need to be mindful of using the finance for legal or appropriate purposes.
Advantages of unsecured personal loans
Less risk to your asset – as no collateral is required, there's much less risk of losing your property if you fail to repay the loan.
Faster application process: the absence of collateral can make the application process faster and less complicated.
Flexible usage: you can use the loan for almost any personal expense.
Disadvantages of unsecured personal loans
Higher interest rates: due to the higher risk to lenders, these loans generally have higher interest rates compared to secured loans.
Stricter approval criteria: lenders may have stricter requirements for approving unsecured personal loans, often needing a good credit score.
Lower borrowing limits: you might be able to borrow more with a secured loan since it’s less risky for the lender.
You can read more about secured versus unsecured loans here.
You're now armed with all the information you need to use a loan responsibly. If you are looking to fund a car purchase with an unsecured personal loan, you can apply here for an Oodle loan.
