How Do Unsecured Loans Affect Your Credit


Any kind of borrowing will have some sort of effect on your credit rating, that goes without saying but what will be taking out an unsecured loan due to your credit? In this article, we are going to take a look at how an unsecured loan might affect your credit rating, in both positive and negative ways.

What Is An Unsecured Loan?

There are two types of loans, secured and unsecured. A secured loan is where you offer some sort of collateral that the lender can take possession of should you fail to make the repayments. An unsecured loan, however, is a loan where there is no collateral in place. With this in mind, it is worth noting that an unsecured loan is much more difficult to get approved for since the lender will be taking much more of a risk. It is for this reason, mainly, that those taking out an unsecured loan will be expected to have a much better credit rating to be approved.

How Do Unsecured Loans Affect Your Credit?

There are many ways that an unsecured loan might have an effect on your credit score, some of these effects are good whilst others are not. Let’s take a look at some of these now.

When you initially take out a loan, your credit score will be negatively impacted for a short period of time. This is due to the fact that the application for the unsecured loan itself will show on your report and the additional credit on your report will be increased. However, this is only a temporary effect and as you make regular repayments, this will change. Your monthly repayments of the unsecured loan will have an effect on your credit, but depending on how you manage your repayments will greatly depend on the effect that they have. If you default on your unsecured loan, then this will have a very negative impact on your credit and the overall score will go down. However, if you keep up with making the required monthly repayments, this will actually have a very positive impact on your credit score. An unsecured loan will not have such a dramatic effect on your credit score as something like a credit card or overdraft. This is because the latter forms of loans are revolving and are often borrowed and repaid month by month and so keep reappearing on your credit report, whereas an unsecured loan is one single loan, therefore only appears once. Once you have completely paid off your unsecured loan, you can rest assured that it will have had a positive overall effect on your credit. This is because, when a loan is paid off after having made regular payments and not having defaulted, it shows that you are a responsible borrower and this will reflect in your credit report. If you fail to repay the loan in full, this can adversely affect your credit score, bringing it right down and if the failure to repay results in a CCJ, you can be almost certain that this will severely damage your credit.


Taking out any type of loan will have an effect on your credit score and unsecured loans are no different. There are various ways that they may affect your credit and not all of them are bad. It is important to factor in your current credit score as well as your ability to pay the repayments, and this will give you a clearer indication of how the loan will affect your credit.

How do payday loans work?

Before we start learning about how do they work, we need to have complete knowledge about what they are. 

Payday loans: also known as short terms loans or cash advance loans; these are loans that are linked to the payday or salary day of the borrower. The repayment of the loan is made on this day as it is. These can also be referred to as salary loans, and these are given to those employees who have previous payroll and employment records. 

Some of the payday loan giving companies also fix a day for the repayment rather than fixing the salary day for it. This day can also be fixed according to your own choice. 

You may also apply for a loan for a more extended period and pay it back in installments. But this option is not always available. 

How does it work? 

To apply for a payday loan, you need to have a proper employment report, and it must be a good one. Once you have this, you are eligible to apply for a payday loan. Payday loans do not require much of the documentations but are strict with the repayment rules. While applying, you need to link it with your payday or salary day. Now, once you have applied for the loan soon, it will be approved. After approval of your payday loan, the loan amount is directly paid to your bank account. At the end of the month or the fixed payday, you will have to repay the loan with full interest and applied charges. If you do not repay it on time high amount of charges can be applied as interest and can cause a financial imbalance for you. Generally, the payday is fixed as the deadline for the repay, but you may get a chance to fix another day as the deadline according to your convenience. 

How much are the charges and the interest amounts? 

Working under the rules of the Financial Conduct Authority, the payday loans can ask from you a limited amount of interest and charge fee. It will be no more than £24 for a loan for 30 days. The charges are applied per £100 borrowed by you. If you do not repay the amount on time, you may be charged with an extra fee of £15. 

What are recurring payments? 

These are also known as Continous Payment Authority. 

When you apply for the payday loan, the lender will ask you to set this Continous Payment Authority to let them control the repay payments. 

How does the recurring payment or Continous Payment Authority work? 

The payday loan lenders take back the repay amount or money will all the interest and fees directly from your bank as soon as you get your payment in it. This way, there is no chance of delay in the repayment once you have got your salary. This method helps you repay the loan without any procedure and banking work. 

Mindfully using the information about all the discussed aspects, the payday loan is a great one for all the employees.