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What is an unsecured loan?

Personal loans explained

published: 05 August 2022
Read time: 5 minutes

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.

What is a personal loan?

A personal loan or unsecured loan is a way of borrowing where you don’t have to put up any security (valuable asset) to get the loan. 

This means that unlike a secured loan you aren’t at risk of losing your home or another high value asset, such as your car, if you cannot keep up with repayments. 

But this doesn’t mean you can default on an unsecured personal loan without facing penalties. If you miss repayments or fail to pay the loan back on time or in full it is likely the lender will try and recoup their losses. 

You could face penalty charges on the loan and increased interest. The lender could start legal action and you may receive a County Court Judgement (CCJ) against you. This will damage your credit rating which is likely to make future borrowing much more difficult and expensive. 

Woman using laptop in office

How does an unsecured personal loan work?

An unsecured personal loan involves borrowing a lump sum of money, typically at a fixed rate of interest. You’ll then pay back the loan (sometimes called the capital) and the interest over an agreed period of time, typically around three to seven years – although this can be much shorter or longer according to your needs 

Applying for an unsecured loan in the UK is straightforward. You’ll need to be aged 18 or over and able to prove you are a UK resident. But unlike a secured loan you won’t need to put down a valuable asset or collateral as security against your borrowing. 

You can search for loans and compare deals with MoneySuperMarket – and we’ll also show you your chances of being accepted without having any effect on your credit score. That’s because we use what is known as a ‘soft search’ which doesn’t leave a mark on your credit file. 

But after you apply for a loan the lender will do a full credit check on you and will want to see evidence of your regular income – to be confident that the loan is affordable. 

Once your application is accepted, you’ll receive the funds from the loan provider – usually directly into your bank account.  

The monthly loan repayments will start immediately and will continue until you have cleared the debt at the end of the loan term. 

What to consider before taking out an unsecured loan? 

  • Do I need the loan? When you take out a personal unsecured loan you’ll be paying interest back on the borrowing – so it means you’ll pay back more in total than you borrowed. Consider whether you need to borrow the money or whether the purchase could wait until you have saved up the cash 

  • Can I afford the repayments? The lender will run a credit check to satisfy itself you can meet the monthly repayments. But you should also be confident you can afford the loan and that it won’t over-stretch your finances. Our handy loans calculator can help work out how much you’ll be paying back each month, or how much you could borrow based on what you can afford to repay. Paying lower monthly repayments over a longer period might be more manageable, but typically means you’ll end up paying back more in interest overall 

  • Am I getting the best rate? Whatever personal unsecured loan you take out, make sure you get the best deal for your needs. Comparing the interest rate or APR, which equates to how much the loan will cost you each year (with interest and any other charges), is a good place to start. Also review the terms and conditions. Are there any other fees on the loan, and what is the early repayment charge? You’ll need to know this fee if you think you may want to pay back the loan early 

What can I use a personal loan for? Unsecured loans can be used for a range of purposes. Your lender will usually ask what you want the loan for.  Typical examples include: 

  • Car or van 

  • Home improvements 

  • Wedding costs 

  • Debt consolidation

As with any borrowing, always make sure you can afford the repayments. 

How much can I borrow with an unsecured loan? 

Unsecured personal loans generally range from around £1,000 to £25,000 depending on the lender. But how much you can borrow will depend on your individual circumstances including your earnings, outgoings and credit score. 

If you need to borrow a large amount you may have to opt for a secured loan. With a secured loan the lender has the security of knowing that should you be unable to pay it off, they can seize your assets – this is usually your home. So bear in mind this risk. Taking out a secured loan may mean you can borrow more and at a lower interest rate but your home is at risk if you cannot keep up with the repayments. 

What are the pros and cons of an unsecured loan? 

There are a number of advantages and disadvantages to personal loans to consider: 

Advantages of an unsecured loan 

Open to all. You don’t need to be a homeowner and offer up the security of a house or other valuable asset to get the loan.  

Quick and simple process. The loan application process is often quick and straightforward because you’ll only need a credit check and to evidence your income. As it is not a secured loan you won’t have to offer any security, such as your home, and have this valued, for example, which can take longer. 

Flexibility. As well as being able to borrow varying amounts, you’ll also have some choice over the length of the loan. Choosing to pay it back over a longer period can help keep the monthly repayments more affordable, although you are likely to end up paying back more in total interest. 

Disadvantages of an unsecured loan 

Higher interest rates. Because you’re not putting down any security against the debt, as happens with a secured loan, you may find lenders charge a higher interest rate – particularly if you have a less than perfect credit rating. The higher your credit score, generally, the lower the rate you’ll be offered. 

Smaller loan. You may be limited in how much you can borrow on a personal loan compared to a secured loan because lenders know that with a secured loan they can seize the valuable asset if you cannot keep up with repayments.  

Fees and charges. Once the cooling off period has passed you are locked into the loan, meaning that if you do want to pay it off early to save on interest, you are also likely to face an early repayment charge. If you miss or are late with a payment you could also incur a fee. 

What is the difference between a secured and unsecured loan? 

An unsecured personal loan does not require you to put up a valuable asset – such as your home – to act as security in case you cannot meet your debt repayments. 

You may be able to borrow more on a secured loan, and potentially at a lower interest rate. Our guide on unsecured loans versus secured loans explains more. 

What happens if I can’t pay back my personal loan? 

If you miss the repayments on your unsecured loan you’ll find the interest mounts up and you can also be hit with late payment fees. 

If you’re struggling to meet repayments, speak to your lender as soon as possible and see if there’s a way you can restructure the loan. Lenders are required to be sympathetic and helpful to customers in financial distress. They could offer different options to you, such as restructuring the debt or a payment holiday, if that is appropriate.  

If you cannot pay your loan back at all and are forced to default, then you could face a County Court Judgement (CCJ), which will damage your credit rating and make it more difficult to borrow in the future. Seek help as soon as possible. There are a number of free and independent debt charities who can negotiate with creditors on your behalf.  

Can I pay my personal loan back early? 

You will be able to pay back your loan early, but you are likely to be hit with an early repayment charge.  

This is because the lender has structured the loan in such a way that they expect to make a certain amount of money from it and if they allow you to pay it back early without charge, they won’t get all the interest they had banked on.  

Before deciding whether to pay the loan off early, factor in the charge to see if it’s financially prudent.  

What are the alternatives to an unsecured loan? 

There are a number of alternatives to an unsecured personal loan. These include: 

  1. Secured loans: Similar to an unsecured loan, but with a secured loan you’ll put down a high value item, usually your home, as security. For this reason they are sometimes also referred to as homeowner loans. 

  2. Guarantor loans: A family member or friend must agree to be the guarantor on your loan. This means that in the event you cannot meet the repayments the lender can ask them to repay. Both you and your guarantor are legally liable for the debt. While this can make borrowing more accessible, particularly for those with a poor credit history and low credit score, there are big implications for the guarantor so it is vital they fully understand their commitments under the agreement. 

  3. 0% interest purchase credit card: If you only need to borrow funds for a short period to make a purchase and are confident you’ll be able to repay quickly, a 0% purchase credit card could be useful. It allows you to spend for a limited period, ie. three months, without accruing any interest on the debt. Just be sure you’ll be able to clear the balance at the end of the 0% period otherwise you’ll end up paying interest on the debt. 

Other useful guides 

Find out more about loans with our following informative guides: 

What type of loan is best for me? 

Is it a good idea to take out a joint loan? 

Secured loans explained 

Compare personal loans with MoneySuperMarket 

Comparing personal loans with us is quick and easy. Just tell about yourself, your financial situation and the type of loan you’re looking for and we’ll compare deals from our leading panel of providers.  

We can show you the most suitable deals for your needs and comparing won’t affect your credit score in any way. 

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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