What is an unsecured loan?
Our guide explains what an unsecured personal loan is, what to consider before you apply, and how you can get one that's right for you.
Key takeaways
For unsecured personal loans, you do not need to put up a security, such as a house or car
Your income and credit score determine borrowing limits and interest rates for unsecured loans
Secured loans offer better rates and higher limits but involve collateral risk, like using your home as security against the loan
Look for competitive interest rates and watch out for early repayment charges
What is an unsecured loan?
Unsecured loans are a form of personal loan whereby you're not required to put up an asset, such as property, a car or jewellery, as collateral.
Unsecured loans will typically charge higher interest rates (APR) than secured loans. This is because an unsecured loan isn't 'secured' against an asset, so the risk to the lender is higher.
What do I need to be approved for an unsecured loan?
To qualify for an unsecured loan, you'll need to be a UK resident and 18 or older.
You'll also need to answer key questions on your loan application, which will cover your financial commitments (like childcare), income, outgoings, and what you intend to use the money for before the lender approves your application.
Your credit history will be checked by lenders and will also affect your loan eligibility. To find out if you qualify for a loan, use our one-stop loan eligibility checker.
How much interest will I pay on an unsecured loan?
The total amount you borrow will be less than you pay back because you pay interest over the loan term. For example, if you borrowed £10,000 over three years at an APR of 13.5%, then:
You'd pay back £335.64 per month
And pay back £12,083.11 overall
With a personal loan, you make regular repayments until the loan is repaid.
If you decide to pay it back early, you'll be subject to an 'early repayment charge', so always balance the cost of the charge against the interest you're saving and make sure you're saving money by paying off the balance.
If you want to learn more about how loan value, term, and APR affect monthly repayments, our loan repayment calculator is free to use.
Why do people take out loans?
People borrow money to pay for unexpected expenses, finance cars, holidays, or weddings, and consolidate debt.
Depending on how you plan to use it, what you need to borrow can vary.
Loan Reason | Average Amount Borrowed |
|---|---|
Wedding | £9714.28 |
Holiday | £4736.77 |
Home Improvement | £11926.30 |
Debt Consolidation | £12390.83 |
What's the difference between secured and unsecured loans?
The main distinction between secured and unsecured loans lies in collateral.
Secured loans might offer more attractive interest rates and higher borrowing limits, but they come with the risk of potentially losing your assets if you can't keep up with repayments.
If you have a poor credit score, some lenders might insist on securing the loan against a valuable asset. It's always worth checking your credit report for errors or easy fixes (like registering to vote) to put yourself in the best possible position for any form of lending.
What are the pros and cons of unsecured loans?
Advantages
It's easier to get an unsecured loan if you don't have any collateral you can use as security. To qualify for an unsecured loan, you usually just need proof of a regular income and a good credit score.
There's no risk to your personal assets, although a lender may still pursue you if you fail to make your payments
You should get a fixed rate of interest, which makes it easier to budget
Applying for a loan is usually faster than with a secured loan
Unsecured loans are generally more flexible, particularly when it comes to paying off the loan early
Disadvantages
Secured loans generally allow you to borrow more money and come with lower interest rates than unsecured loans
You should generally expect to be offered a shorter repayment term with an unsecured loan than if you opted for a secured loan
What types of unsecured loans are there?
Unsecured loans, which are typically provided by banks, building societies and credit unions, can take the form of standard bank loans, guarantor loans, student loans and payday loans.
Credit cards aren’t classified as loans, but they are a form of unsecured credit.
Can I get a joint unsecured loan?
You can. But it's important to note that when you take out a joint loan, secured or unsecured, it creates a 'financial association' on your credit file.
Financial associations are included in credit checks, so be careful when taking out joint credit agreements as it can affect future lending eligibility.
What happens if I'm struggling to pay an unsecured loan?
If you struggle to meet your repayment obligations, it's vital you get in touch with your lender.
They may be able to restructure your payment plan. Ignoring the problem could lead to a County Court Judgment (CCJ) and a tarnished credit rating.
What are my alternatives to secured or unsecured loans?
If loans don't seem like the right fit, other forms of borrowing include:
Arranged overdrafts with your current account provider
Other useful guides
Compare loans with MoneySuperMarket
Whatever type of loan you’re looking for, it’s quick and easy to compare loans with MoneySuperMarket.
Simply tell us a few details about your finances and the type of loan you’re looking for and we’ll search our panel of leading providers to find the most suitable deal for you.
Our ‘soft search’ will show you your chances of being accepted for each loan without it affecting your credit rating.
You can compare the key information such as interest rates and monthly repayment amounts before making your choice, clicking through to the lender and completing your application.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.
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