I have worked in 2 different high street banks now, and each bank has different types of secured, unsecured personal loans and personal loan payment protection that can be brought alongside this to protect you as a form of insurance against accident, sickness, redundancy and death.
Unsecured loans are simply a loan of money which can range from 500-30000 in some places which has no form of tie in involved (such as a house, car, business for example).
This means that legally if loan repayments were not to be repaid back for any reason, you have not signed a contract which allows the creditor to take your assets as a guarantee. As a result of this, the risk of someone not paying back the money is higher and thus why creditors charge a higher interest rate.
Your unsecured loan can be protected as a payment each month (called many different names mostly loan protection payment premium/insurance) lumped in with the personal loan or paid up upfront (banks never seem to offer this though). Reason being is that then the creditors can charge you interest on both the personal loan sum and the payment protection policy which means you pay the creditor more money.
With this baring in mind what are the implications of not paying back the loan for example you fell out of work with no payment protection insurance….
First of all your creditor will contact you making all kinds of threats demanding the money to be paid. When 2 payments are missed generally this is when you will be passed on to the collections department. This department sole responsibility is to salvage the relationship and get as much money back as possible. Sometimes creditors will remove the interest being paid. Other times you will be passed onto a debt collector threatening to take you to court. Rationally speaking it will determine on who the debt is with and how much is owed to whether or not you will go to court. 99 per cent of these letters are purely scare tactics just to get the money from you.
If you think you are in this position it is suggested that you visit the citizens advice bureau who has the job of looking after us. they provide a service for free which take care of the threatening letters and will negotiate on your behalf small repayment plans with your creditors to repair your relationship with them and your credit score.
If for any reason they can’t help through you not fitting the criteria they have there then you can seek an IVA (involuntary arrangement agency) who for a small fee will do this work for you and work independently.
The other alternative is to call your creditor yourself as this is also free and you can hopefully come to some arrangement. This is about as far as it normally gets with defaults and ccjs added if no arrangement has been come to within a certain timescale.
If you want to go about understanding or improving your credit-score, please see my other article.