How to Avoid Getting Unsecured Loans at High-Interest Rates

Unsecured loans are expensive. The risk is on the part of a lender, so that the interest rates will be higher. In the scenario of a default, a loan provider does not have any collateral to cash out. However, it does not imply that they will not get their money back from you if you fail to comply with payments.

Unsecured loans carry high-interest rates and are even higher when you take them out with a bad credit rating. The rule of thumb says that you should use unsecured loans only when you have a good credit score.

However, does that enough to be able to clinch a deal at an attractive interest rate? Perhaps not, and you must know it already. So, what do you need to focus on to ensure you do not get unsecured loans at high-interest rates?

You should do your homework

Unsecured loans are not payday loans exclusively available from direct lenders. Banks and credit unions are also the destinations to apply for these loans. The primary thing is that you need to find out from whom you want to apply for the loan. Get a pre-approval letter from banks or direct lenders to evaluate interest rates.

Banks may not be as flexible as direct lenders when your credit score is not so impressive. They will reduce the lending amount, but that is to your advantage. Search out how much you can borrow from credit unions. You will probably get a lower sum, but interest rates will be more affordable.

Getting pre-approval letters will not damage your credit points, as no hard credit checks are run. With pre-determined interest rates, you can get to know who you should apply to for unsecured loans without a guarantor. Of course, you will pick the one that offers lower interest rates but bear in mind that the actual interest rates will not be the same as they are determined after affordability checks.

You must consider your budget

“Whether or not your loan is expensive does not just depend on the interest rates you are offered, but it also depends on your budget.” You get caught up in the loan process that you do not realise whether your budget has the potential to pay back the money you are borrowing.

It has nothing to do with overborrowing. Suppose you need £5,000 and you manage to borrow this much money. But have you found out if your budget has the room to pay this additional expense?

Remember that you will pay interest on top of £5,000. After meeting all your recurring expenses, the monthly instalment will be paid from what you have left. It is likely that you are left with insufficient money to be able to adhere to instalments.

If this is the case, you will end up with missed payments. This will result in rolling over the loan. Late payment fees will be added to your account, and the cost will quickly add up to the debt. Online calculators can help get estimates about monthly instalments.

“If you see your budget does not have enough room, you should try to borrow less than you need.”

Be wary of scams

You can end up with an extortionate unsecured loan if you are not careful about your research. It is constantly suggested that you should never grab the first-hand offer. Take your time to pick the best deal to avoid bearing outrageously higher interest rates.

• Look for transparency

Try not to borrow money from lenders that have confusing terms. Make sure you turn to lenders that are absolutely transparent with the repayment terms and interest rates. Many lenders advertise flexible deals, but it is not told what it exactly means. Does that mean you will get a personalised repayment plan, or will you get switching services when you cannot stick to the current repayment plan?

Online reviews will allow you to be familiar with the lender’s behaviour. Visit the websites like Trustpilot to read authentic reviews from people about lenders. You can even find that you are applying for the loan if the lender is legitimate.

• Do not get trapped with phone loans

There are some lenders that have only an online lending business but not a physical address. Such lenders provide loans only on the phone. It is crucial to note that no lender can provide you with a loan over the phone.

“You will have to complete the online form and then sign the agreement to show that you comply with all terms and conditions of the contract.” Unless you sign a loan agreement, no lender will you be able to loan money.

• Watch out for upfront fees

Short-term loans are not subject to upfront fees. When you borrow funds from a direct loan provider, they cannot charge you upfront fees. Unsecured loans are not subject to any collateral or security in any form. So, if a lender is asking you to repay some fees upfront, be clear that the lender is not legitimate.

You can ask about the associated fees at the time of getting a pre-approval letter. Monthly fees, late payment fees and early repayment fees may be charged. You will get to know about it in the agreement in detail. In case of any queries, you can ask your lender prior to signing the agreement.

Unsecured loans are not small emergency cash loans, so that you will have a cooling-off period. Take advantage of this period to decide whether all terms and conditions are favourable to you. If you are not entirely sure, there is no requirement to sign the agreement.

In fact, some lenders will require you to return money within two days after getting money in your bank account without imposing any early repayment fees or penalties.  

The bottom line

You can avoid unsecured loans at high-interest rates if you do proper homework, carefully scrutinise your budget and are wary of scammers. Not to mention, your credit score should be as good as possible.