Unsecured personal loans

Unsecured personal loans let you borrow money without having to offer up any assets, such as your car or your house, as collateral. The decision to offer someone an unsecured personal loan is based on their ability to pay back the money they borrow. The lender will run credit and identity checks to make sure you are who you say you are, and assess how likely you are to repay the loan.

Unsecured personal loans let you borrow money without having to offer up any assets, such as your car or your house, as collateral. The decision to offer someone an unsecured personal loan is based on their ability to pay back the money they borrow. The lender will run credit and identity checks to make sure you are who you say you are, and assess how likely you are to repay the loan.

Rob Silvey
Finances expert
minute read
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Posted 26 NOVEMBER 2019 Last Updated 22 FEBRUARY 2022

What exactly is an unsecured personal loan?

Unsecured personal loans are an agreement or contract between you and the lender. You are allowed to borrow the money on the basis that you agree to pay back your unsecured loan within the timeframe you’ve promised.

Even though unsecured loans don’t require you to offer any security, the lender still has a legal right to take back their money in some way if you can’t make the repayments. This could mean that the lender arranges a County Court Judgement (CCJ) against you – and having a CCJ listed on your credit report is something you should try to avoid.

What exactly is a secured personal loan?

A secured loan or homeowner loan means that you’re borrowing money using your assets as security – usually your house or, in the case of some car loans, your vehicle.

This basically means that if you can’t pay back your loan, the lender can take possession of your asset. Because the stakes are higher, you’ll usually be able to borrow more with a secured loan than an unsecured one.

Should I choose an unsecured loan?

An unsecured loan can be a flexible way of getting money that a credit card alone couldn’t give you. It’s also a good option if you don’t own your home.

Unsecured loans are typically for smaller amounts, usually between £1,000-£25,000, whereas a secured loan can be for up to £100,000 or more.

Another feature of an unsecured loan is that lenders usually set out fixed payment plans so you know exactly what you’ll be paying every month. And in most cases, you’ll get to choose over what period you pay back the loan, which could be up to 10 years.

Could I get an unsecured loan?

That all depends on you and your personal circumstances. Because you’re not offering any security with an unsecured loan, lenders tend to be picky about who they lend money to – after all, they do want it back.

You stand more chance of getting an unsecured personal loan if you:

  • Have a good credit history Lenders want to see that you can manage your money and be confident that they’ll see their loan repaid.
  • Are on the electoral register Lenders check your identity and may refuse you credit if your name isn't on the register. Sometimes lenders will accept additional proof of a new address, such as a utility bill, tenancy agreement or mortgage details, if you’ve just moved.
  • Are employed If you have a job, preferably a secure one, then lenders will see that you have a means of paying back the loan. Find out more about loans for unemployed people.

Find out what loans you’re eligible for without impacting your credit score.

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What are the pros of an unsecured personal loan?

Some of the main benefits of taking out an unsecured loan include:

  • You don’t have to be a home owner
  • If you’ve got a good credit history then you’re more likely to be able to get a loan with relatively low interest rates.
  • Some lenders offer loans with additional features, such as payment holidays, which can give you some breathing space, while others give existing customers cashback once the loan has been fully repaid.
  • Unsecured loans are also flexible as you’ll usually be given options of what period you pay it back over.

What are the cons of an unsecured personal loan?

An unsecured loan isn’t always the right choice. The negatives of this form of borrowing are:

  • It’ll be harder to get an unsecured loan if you have a bad credit rating. Most of the preferential rates will be reserved for people with a good or excellent credit rating. That’s not to say you won’t be able to get an unsecured loan if your credit score is less than perfect, but it does mean that you’ll likely face higher levels of interest.
  • Unsecured loans are deemed higher risk by lenders due to the lack of collateral. They tend to come with higher interest charges than secured loans.
  • Lenders may vary the interest rate depending on the amount of money you want to borrow, so you might find that borrowing slightly more than you actually need will give you a better rate. For example, you might be offered a lower rate of interest when you borrow £5,000 rather than £4,750. But you should consider the overall cost to you for the larger sum and not borrow more than you can afford to pay back
  • Some lenders may charge an early repayment fee if you are able to pay your debt back sooner than the timeline you have agreed.

Can I get an unsecured loan with bad credit?

It’s not impossible to get an unsecured loan with a bad credit history, but it is more difficult. As you don’t have an asset to put up as collateral, lenders are likely to be more reluctant to offer you a loan. You may also have to pay a higher rate of interest too, to reflect the higher risk to the lender.

Although there are unsecured loans available for those with a poor credit history, there are alternatives:

  • Guarantor loan – this is when a friend or relative guarantees to pay back the loan if you can’t. One of the disadvantages of these loans is that you could leave your guarantor in debt if you fail to make the repayments.
  • Credit-building credit card – this allows you to improve your credit history by borrowing a small amount of money and paying it back on time, therefore showing that you can be responsible. The maximum spend limit is usually much lower than other credit cards – typically £100 to £1,200.

What can I use my unsecured loan for?

Lenders will typically ask what you want to use your loan for. Usually, people borrow when they can’t afford to pay for things with one lump sum, including:

  • Home improvements like a new kitchen or bathroom. You might also want a loan to maintain your property: replacing the roof, for example.
  • A used or new car. You might choose to use a personal loan to buy a car rather than a car finance plan.
  • An expensive purchase, like a new boiler or major car repairs.
  • To fund a business. But you should make sure your business plan will enable you to pay back the loan affordably.
  • Debt consolidation. To bring all your debts together in one place, allowing you to make just one – potentially lower – monthly payment. But be aware that taking on new debt is a big decision. Extending the term of your loan can incur more interest and cost more in the long run, and there might be early repayment charges for paying off your existing debts.

If you’re considering getting a loan to pay for day-to-day expenses and outstanding bills, then you should consider getting free debt advice to help you get your finances back on track.

What happens if I miss a payment?

If you miss a monthly repayment it will be included on your credit record, typically for six years, which could impact your ability to get credit in the future. Your lender is also likely to charge you fees for missing a payment.

Ideally, you should pay the missed payment as soon as possible, plus any fees you’ve been charged, and make your next payment on time. If you can’t afford to do this straight away, you’ll be in arrears on the total amount outstanding on your debt. You’ll need to discuss options with your lender and ideally get some independent debt advice.

If you’ve simply forgotten to make the payment, set up a direct debit or standing order so that the monthly repayments will be made automatically in future.

How long can I borrow for?

Most unsecured loans are typically for 1-10 years, but you may find longer terms for larger amounts. Generally speaking, the longer you borrow for, the lower your monthly repayments will be - but the total amount you have to pay back will be more. This is because you’ll be paying interest for longer.

When comparing loans with us, you can vary the loan amount and the length of time you take to pay it back. By inputting different options, you can work out the best option for you.

If you want to borrow a large amount of money for a longer period to lower the monthly payments, consider whether an unsecured or secured loan is your best option.

A secured loan will use an asset like your home as a guarantee. This can be sold by the lender to get back their money if you fail to keep up with the repayments, meaning you could lose your home. However, because the lender has this security, you may be offered a lower rate of interest.

What happens if I’m turned down for an unsecured loan?

If your loan application is turned down it will go on your credit record, which may discourage other lenders from offering you credit. If a lender has said no, you should try to work out why so you can fix any issues before you apply for other loans. And, ideally, see if you can improve your credit record to reduce the chance of being turned down for a second time.

To improve your chances of being accepted for a loan, first check your credit record to make sure the details are correct. You should be able to do this for free online. There are three main credit reference agencies (CRAs), so check the details that all of them hold for you:

  • Experian,
  • TransUnion (its online brand is Credit Karma)
  • Equifax

If the information is wrong or out of date, contact the agency directly to get them to correct it.

Then use our loans eligibility checker to find the loans that you’re likely to be accepted for. We use a soft credit check that doesn’t go on your record.

Compare with us and find a loan to suit you

Now that we’ve clarified what an unsecured loan is, you’ll have a better idea of whether one’s right for you. If it is, you can compare loans with us without impacting your credit score. You'll be able to see any age criteria, whether repayment holidays are allowed and if you can use the loan for debt consolidation

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

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