Factors that Influence the Terms of an Unsecured Loan

Created: 2019-06-27 10:30:00

The terms of an unsecured loan are specifically determined by the profile of a borrower and other crucial aspects of the loan being sought. While there are standard terms in all loan agreements, the most important elements will be influenced by various factors. Let us explore such factors and examine the kind of influence they may have on your unsecured loan.

• One major factor is the loan amount. If you seek a very small loan amount, then a lender is typically more lenient with the terms. If you apply for an unsecured loan such as payday loan for a hundred pounds, the terms of repayment can be substantially more reasonable than those for a borrower who applies for a thousand pounds. The comparison is incomplete without factoring the profile of the borrower. One who earns enough to conveniently repay a thousand quid may not be presented with unreasonable terms. Affordability does play a huge role in how lenders assess risk. If a borrower has substantial liability and the income does not leave much cash to spare, then it a risky proposition for the lender and hence naturally they would increase the rate of interest.

• Credit score influences the terms of unsecured loan. Anyone who has a poor credit history may still qualify for an unsecured loan but the rate of interest may be higher. It is also possible a lender will ask the borrower to choose a smaller loan amount. This is simply so they can mitigate the risk they will get exposed to. Every lender assesses its risks and accordingly chooses the returns it wants to secure. A higher interest will ensure the lender recoups substantial part of the loan amount quickly in the event the borrower fails to repay the full sum by the end of the repayment term.

• The repayment term also influence the annual percentage rate. If the repayment term is long enough to bring down the installment of the unsecured loan to reasonable levels, then the lender may assess the scenario as less risky and hence the rate of interest may be more reasonable. If the installments are too high given the income and nature of employment of a borrower, the lender will sense more risk and hence hike the rate of interest. It is not uncommon for lenders to charge higher processing fees and impose greater fines in some cases so they can recoup most of their investment.

Warning: Late repayments can cause you serious money problems. For help, go to moneyadviceservice.org.uk