There are two primary kinds of loans available on the market today – secured, and unsecured loans. Secured loans are loans in which some type of collateral is used to hold the loan; usually this is the borrower’s home, or perhaps a car in the case of hire purchase. If the borrower defaults on the loan, the lender has the option of taking possession of the collateral. Unsecured loans, on the other hand, do not require collateral to obtain.

Secured Loan Limits and Lenders

In most cases, lenders limit the amount of unsecured loans to between £15,000 and £20,000. Unsecured loans can be used for any reason, from taking the vacation of your dreams to having a medical procedure done, to starting a new business to consolidating debt. Although the lender may ask you what you plan on doing with the money on the loan application, really it is up to you how you use the money once you receive it.

Common lenders for unsecured loans are banks, credit unions, online loan companies and specialist lenders. Generally, lenders want you to have good to excellent credit before they will lend you money for an unsecured loan. You must also be able to demonstrate that you are gainfully employed and can afford the loan payments.

Online lenders often offer better terms than banks or credit unions. Additionally, the application process is often very fast and easy. Generally, you only need to fill out an online application and provide details such as your employment information, the amount of money you want to borrow and what you intend to do with the money. In some cases, you will need to fax a copy of your most recent pay slip to the lender. With online lenders, applications are often approved within 24-48 hours and the money is transferred into your bank account right away.

Despite the ease with which online loans can be arranged, due care should be taken to avoid “Pay Day” loan companies, whatever your circumstances. With typical APR’s in the region of 2,000-8,000% it is an extortionately expensive way of obtaining a loan for longer than a few days and despite the welcoming façade such companies present, they remain dangerous traps to the unwitting.

For individuals who are self employed, it may be necessary to use a specialist lender for an unsecured loan. Specialist lenders are often more willing to work with individuals who are considered high risk, such as individuals who do not have a long credit history or whose income is less stable due to self employment. If you are self employed, you may need to supply copies of your tax returns or business accounts for the past several years to prove your income.

Smart Use of Unsecured Loans

If you decide you want to take out an unsecured loan, do not borrow more than you can afford to repay, and consider other means of raising required capital such as saving. If you fail to meet the terms of the loan, it could be detrimental to your credit history. Even late payments will have a negative impact on your credit and influence your ability to get a mortgage or car loan in the future.

Unsecured loans are often for a term of between two to 10 years and are at a fixed rate of interest. If you find yourself having problems making payments, contact your lender immediately. Lenders are often more willing to work with you to renegotiate the loan if you communicate with them openly and honestly as soon as possible.

Before taking out an unsecured loan, shop around different lenders to find the best loan terms possible. Make sure you completely understand the terms of the loan before signing the loan documents and accepting any payments. A  final precautionary tale to shopping around is that that quoted APR’s are not necessarily the rate you will receive, and applying for a loan will impact your credit rating as it will record a search, even if you later choose not to go ahead with it.

If you caught the first post in my ‘Dig Yourself Out of Debt‘ series last week, you will  know how important I think it is to know exactly where you stand in terms of your total immediate unsecured liabilities, and any cash reserves you may have. Now, before the uber-observant amongst us say anything – yes I realise that ideally if you have cash reserves you would pay down debt! Afterall, the interest you are probably earning on any positive balance from cash is likely to be dwarfed by the loan or credit card APR.

All that said however, you may like me be stuck with a front-loaded loan that offers no benefit of repaying early (other than to see the back of the loan) and no option of making over-payments. The only option in that scenario is to save up the lump sum necessary to pay off the balance (plus the penalty of one month’s worth of interest) if you want rid of it early – which I do.

At the end of my own ‘Know What You Owe’ fact-finding mission, I did some simple math and came up with my ‘net worth’ (net worth literally just means how wealthy you are), and it’s really easy to figure out.

Add up everything you owe (liabilities), and subtract that amount from any cash and savings you have. Whatever you are left with is your net worth. Simple!

I wanted to know how I was getting on with meeting my own debt freedom target (no later than New Years Day 2010) so I dug out copies of my loan account payments, credit card and bank statements, payslips and my budget spreadsheet, and made myself another spreadsheet with a few simple formulas thrown in to make things easier. Nothing too crazy required, just a couple of simple =SUM() calculations in certain cells to make the laborious leg work a little less laborious…:

The current month is highlighted in bold. Taking my other liabilities into account (the last £203 on my Barclaycard credit card), you can see my total liabilities at the moment are £9,156. But, I have £4,204.51 in cash in a combination of my current and savings accounts. Subtracting total liability from total liquidity, my networth is currently -£4,951.49. Basically, I owe almost five thousand pounds more than I have.

Scroll down a few months into the future however, and things improve. By November I’m only £220 shy of breaking even. In other words, I am currently set to become debt free by 20th December (A full 12 days ahead of target). If I make up that small shortfall, that could drop back to 20th November, 6 weeks earlier than planned. Assuming I don’t get made redundant between now and then and my overtime plans come off, I could knock a couple more weeks off that.

One word of caution though: remember that any entries beyond the present are projections. If you are projecting your own, remember that things often conspire against you; If my car blew up tomorrow, I would have to use some of my cash to fix it, pushing me away from the projected freedom date. Use it as a ready reckoner however and we can see that if all goes well using current known-good data (e.g. the data up until the highlighted line), I won’t be any later than my target, and that was the whole point of this exercise.

Are you currently in negative networth? Do you even know with any certainty? Kudos if you do. You’re not in the minority if you don’t though. Take the first step to digging yourself out of debt and know what you owe. Once you know, you can work out your own net worth and project a date to get into positive growth (or be incredibly unscientific about it and just make up a date like I did!).

If you’re already digging, how is your own target prediction holding up?Leave a reply in the comments below.

This is part 1 of the “Dig Yourself Out of Debt” Series, published every Thursday. Surfing old posts? You can access every post in this series by clicking here.

I’m a regular over on the Money Saving Expert forums, particularly the ‘Debt-Free Wannabe’ area. On a daily basis, people post that they owe money, but they’ve no idea to whom, how much for, or at what rate. Before you can even begin to cut your debt, you have to know what you owe.

Priority Debts – First things first. Do you have any Priority Debts? These generally are:

• Council Tax
• Mortgage / Secured Loan / Rent
• Child Support
• Court Fines

Falling behind on these can see you homeless, sent to prison or both, hence the term ‘priority debts’. Either is unlikely though, if you make a best effort to pay back what you owe with what you have available to you. In terms of council tax, the minimum arrears payment for someone on a low income can be as little as £2.65 a week.

Once you have got your priority debts under control, it’s time to attack ‘everything else’.

Find your loan agreements – Hopefully you’ve kept them safe and accessible. These will show what you’re paying, at what rate, and when it ends. If you can’t find this then check your bank statements to at least get some idea of the monthly figure. We’ll see in a little while how to find the remaining missing information.

Find your credit card statements – or access them online. Credit cards with revolving balances are usually one of the most expensive ways to borrow money longterm, with perhaps the exception of the payday loan sharks. Interest rates vary wildly from a very good 6% up to a wild 55% and beyond, depending on your own personal circumstances and payment history.

Are you in arrears with utilities? Don’t forget to take into account any arrears with your electricity, water, gas, or telephone suppliers. These generally won’t affect your credit rating but can have much more direct consequences, i.e. disconnection.

Are you in arrears with credit companies? You need to take action right here. These will affect your credit rating, and can and will end up costing you a fortune for up to 6 years after the fact. Talk to your lenders and come to an arrangement to pay what you owe, including arrears. Ask them if they can freeze your interest, effectively turning the credit product into a fixed-term loan. Don’t bury your head in the sand over the issue, as it’ll only get worse the longer you leave it. You’ll also probably start to get harassing telephone calls hourly or daily around this point, demanding you make payments you probably cannot afford. You don’t have to take this though: demand all contact by written form in future and advise them that further telephone calls will be dealt with as harassment. Speak to one of the debt charities (CCCS are very good) or Citizens Advice as a matter of urgency.

Defaulted. Debt sold. Now who do I owe? – This is where it gets murky. If you know who you owed prior to this point, contact your old lender. They may be able to tell you who they sold the debt onto.Alternatively pull your credit reports and see where the defaults are, and who they are from. This will also give you some idea of the amounts. If it has got to this point, your credit rating has already likely taken all the battering it’s going to for this debt, so it gives you the upper hand. Your debt would have been purchased likely for pennies in the pound, so you may be able to make a vastly reduced payment to the Debt Collection Agency. They would get their ‘profit’, even though you pay far less than you originally owed. It won’t fix your credit report though, but neither would paying back the full amount.

Get Your Credit Reports – There are three Credit Reference Agencies (CRAs) in the UK: Equifax, Experian and CallCredit. These folks compile your financial history in terms of your borrowing and more importantly, your reliability in paying back. Other lenders then use this historical information to credit score your future suitability for a particular product.

The information on the files remains for 6 years from the point of settlement, so if you had a bumpy credit card ride when you were 18 and finally closed the account when you were 20 it can still affect you when you try and get a mortgage at 25! Check their respective websites for a 30 day free trial, but remember to cancel before the period is up to save paying anything. Right now (at the time of writing) Experian and Equifax offer free trials. CallCredit charge £12 for 3 months of access.

One benefit of accessing your reports is they can help fill the gaps in your lending knowledge. The CRAs will know what you owe, to whom, when the agreement started, how much you should be paying, and when those payments are due!

Knowledge is power, and once you know what you owe, you are very knowledgeable indeed.

Continue reading the Dig Yourself Out of Debt Series – Part 2 is here.