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Unsecured personal loans

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.

As you’re not providing any kind of guarantee to the lender that they’ll get their money back, they’ll 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.

Anelda Knoesen
From the Money team
5
minute read
Do you know someone who could benefit from this article?
Posted 12 MAY 2020

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 some 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 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. 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.

Although there are unsecured loans available for those with a poor credit history, there is an alternative:

  • 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 good 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.

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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 start with us to find the most suitable loan for you. You'll be able to see any age criteria, whether repayment holidays are allowed and if you can use the loan for debt consolidation. We’ll do all the hard work so it's easy to compare loans for the amount you need.

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