As the name implies, unsecured loans don't require the borrower to pledge any of his assets like home as security against the loan amount borrowed. Instead, the loan is granted viewing the borrower's credit history and his ability to repay the loan. These loans are also called signature loans or consumer loans. Unsecured loans are multiple loans that can be used for a plethora of purposes. Some of these are mentioned belowDebt consolidation Going for holidays Meeting educational and medical expenses Wedding expenditures Education purposes
The following are the parameters on the basis of which a lender grants unsecured personal loans to the customers.
The credit history of the borrower - This is the most important criterion for judging a borrower. If the borrower has a number of defaults, arrears and miss payments in his credit history, his chances of securing an unsecured personal loan are low. He may, though, get a bad credit unsecured loan at high interest rate. If the credit score of the borrower is above 700 on the scale of 800, he may get an unsecured more comfortably because of his excellent credit record.
The DTI ratio of the borrower - DTI i.e. Debt to consolidation ratio reflects the affordability of the borrower. DTI = Debts/ Income of the borrower. If the DTI is greater than 3.6, the borrower has good chances of getting an unsecured loan.
So, the above cited reasons are the two most important factors that contribute in the lender's decision in respect to the loan amount, loan tenure and APR to be charged. If the credit history of the borrower is bad but the DTI ratio is good, the borrower may get an unsecured loan. Better the credit score of the borrower, lower his annual percentage rate (APR).
The amount one can borrow as unsecured loans start from as little as £500 and can go up to £25,000. Because the borrower doesn't secure the money by any collateral, lenders tend to limit the value of unsecured loans to £25,000. The repayment period may stretch from six months to 10 years.