But things have changed.
Sainsbury’s Bank recently announced that it is offering unsecured loans of up to £35,000, up from its previous limit of £25,000, to both new and existing customers.
This is unusual because the vast majority of loans of this size are secured on your property. And that means your home is at risk if you don’t keep up with repayments.
An unsecured loan has the benefit that it does not use your property as security, so you don’t have to OWN the home you live in to apply.
What’s the deal?
The mammoth-sized Sainsbury’s unsecured loan comes with a headline representative annual percentage rate (APR) of 6.9% if you borrow between £25,100 up to £35,000 over a 4 or 5 year repayment term.
If you opt for a shorter repayment period of 2-3 years, the rate is even lower at just 6.8% APR.
For context, many of the major mortgage lenders are currently charging standard variable rates of 3.99% with some, such as Barclays, higher at 4.99%.
So, if you don’t need a home, what WILL you need?
-An excellent credit rating: If you don’t have this, you may be offered a higher rate depending on your individual circumstances
-A Nectar loyalty card which has been swiped in store or used online in the last six months
There are no loan set-up fees and you’ll be offered the option of a two-month repayment holiday at the start of the loan.
Simon Ranson, head of banking at Sainsbury’s Bank said; “Our new loan limit offers greater choice and flexibility to those considering making a significant investment or purchase, such as home reconfigurations and renovations like an extension.”
Pros of Sainsbury’s offer
Sainsbury’s is the first, and so far the only, provider to offer unsecured loans of this size to BOTH new and existing customers. However, existing customers with a tiny number of other providers can also borrow up to this amount.
For example, if you are an existing Barclays’ customer with a current account, savings account, Barclaycard or mortgage, you can borrow up to a total of £35,000 through an unsecured loan with the bank. New customers won’t be eligible.
Barclays’ loans between £25,100 up to £35,000 have a higher representative APR of 8.5% for terms between 2-5 years. The actual rate you are offered will again depend on your individual circumstances.
The vast majority of loan providers, including Halifax, Tesco and Clydesdale Bank, cap the amount they will lend at £25,000. So the opportunity to borrow up to £35,000 with Sainsbury’s is great news if you need a large lump sum, say, to pay for a home improvements such as loft conversion.
Of course, loans aren’t just for home improvements – there may be lots of other reasons you need a big lump sum, such as to cover education costs or to pay for a wedding.
What to watch out for
Taking out a loan for £35,000 is a serious financial commitment, so you must be certain you can afford the monthly repayments.
Although an unsecured loan has no automatic link to your home, this doesn’t mean that your property won’t be at risk if you can’t pay off what you owe.
An unsecured loan has the benefit that it does not use your property as security, so you don’t have to OWN the home you live in to apply
Lenders still have the legal right to recover their money if you can’t make repayments. That means they could take you to court and in extreme circumstances you could end up having to sell your home.
Sainsbury’s loan rates are very competitive, but it’s still worth exploring alternative borrowing options too. For example, with mortgage rates currently so low, it could be more cost-effective to remortgage and borrow the funds you need that way.
But this will only be the case if you can pay off your debt in the same time you would have taken to clear your loan.
If you don’t, and end up borrowing the funds over a typical mortgage term of 25-years, you’ll end up paying thousands more in interest that you would if you’d chosen a short-term personal loan - even if the mortgage rate is lower.
Remember too that another disadvantage of choosing the mortgage route is that unlike an unsecured loan, this debt is secured on your property.
Check your credit rating
You should get hold of a copy of your credit report before you apply for a loan, as this will give you a good idea of how likely you are to be accepted for a loan.
If you have a low credit score, then your application may be refused, or you’ll be offered a much higher loan rate than the representative APR advertised.
You can get hold of a copy of your statutory credit report for £2 from any one of the three main credit reference agencies, Experian, Equifax or TransUnion.
Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.