Unsecured personal loans

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Unsecured loans are a straightforward way of borrowing money if you need to buy something expensive, like a new car or boiler. You don’t have to offer up your home or another asset as collateral, as you do with a secured loan. Find out more in our guide to unsecured loans.

What is an unsecured personal loan?

An unsecured loan, more commonly known as a personal loan, is a way of borrowing money from a bank or other lender without putting up an asset, such as your home, as collateral. It can be used to spread the cost of an expensive purchase or even to combine your debts.

How do unsecured loans work?

When you apply for an unsecured loan, the lender will look at your financial status and credit history to assess how much of a risk there is in lending you money.

As you don’t have to offer up any collateral, they need to be confident you can repay what you borrow, with added interest. The interest rate you’re offered will be based on your risk profile.

You borrow the money on the basis that you agree to pay back the full amount in instalments within an agreed time, together with any interest owed.

You can typically borrow between £1,000 and £25,000, although Compare the Market compares unsecured loans up to £50,000. Unsecured personal loans are usually paid back over between one and five years, but up to 10 years in some cases.

Lenders usually set out fixed payment plans so you know exactly what you’ll be paying every month.

What is the difference between secured and unsecured loans?

An unsecured loan doesn’t require you to put up a valuable asset as security in case you can’t meet your debt repayments, whereas a secured loan does.

This asset will often be your home or, in the case of some car loans, your vehicle.

While no collateral makes an unsecured loan less of a risk to the borrower, it’s considered more risky for the lender. To reflect this, you’ll normally be able to borrow smaller sums of money over a shorter period than with a secured loan.

Interest rates are typically higher too and you may need a good credit score to get a decent rate.

What can I use unsecured loans for?

Lenders will typically ask what you want to use your loan for. Usually, people borrow to spread the cost of a major expense they can’t cover with savings, 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 rather than a car finance plan to buy a car.
An expensive purchase. This could be a new boiler or major car repairs.

Another reason for taking out an unsecured loan is debt consolidation. This brings 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. There also might be early repayment charges for paying off your existing loans.

A loan isn’t designed to cover day-to-day expenses and outstanding bills. If you’re struggling to stay afloat, free debt advice is available to help you get your finances back on track.

Should I choose an unsecured loan?

Managed responsibly, unsecured loans can be a good way to finance a major purchase. You’re typically borrowing smaller amounts and repayments are fixed, making budgeting easier.

However, interest rates will add to your debt, so explore whether you might be better off with a 0% purchase credit card. With this, you can spread the cost of an expensive purchase without paying any interest for a set period. That’s assuming you can get a credit limit big enough to cover the amount you want to borrow. If not, a loan could be a better solution.

Taking on any form of debt should be a careful consideration. While an unsecured loan is less risky to the borrower than a secured one, you’ll still need to pay back what you owe.

If you continually miss your repayments, it could damage your credit score and debt collection agencies could chase you for the money. This could eventually lead to you being taken to court.

Can I get an unsecured loan?

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 their loan will be 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 about loans for unemployed people.

Before applying for a loan, you can see which loans you’re likely to be accepted for without impacting your credit score. This reduces the likelihood of your application being declined, although it doesn’t guarantee acceptance.

Check your eligibility

What are the pros of an unsecured personal loan?

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

Fast access to funds – you’ll have the money in your bank account within days (or even hours) of being approved.
Widely available – you can compare rates to get a competitive loan and find a lender likely to accept your application.
No asset required as security – you don’t have to be a homeowner and offer up your property as collateral, nor get someone to guarantee the loan for you.
Fixed payments – your monthly repayments are fixed for the length of the loan, so you’ll know exactly how much you owe.
Potential to boost your credit score – paying off your loan debt on time every month could improve your credit rating.

What are the cons of an unsecured loan?

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

Higher interest rates – repayment rates are often higher when a loan isn’t secured against collateral, making it more expensive overall. An interest-free credit card could be a cheaper alternative, if you pay off the balance on the card within the interest-free period.
Fees and charges – some lenders may charge an early repayment fee if you pay back your debt sooner than the timeline you’ve agreed. You could also incur a fee for late or missed payments.
Tough eligibility criteria – because of the risks to the lender, it can be harder to get accepted for an unsecured loan if you have a poor credit rating.
Risk to your credit score – if you make multiple applications for a loan, or fail to make your repayments on time, this will damage your credit score.

Are unsecured loans expensive?

Although an unsecured loan might have a higher interest rate than a secured loan, it doesn’t always mean it’s more expensive. The cost of a loan depends on the APR you’re offered, how much you borrow and for how long.

If, for example, you borrow £10,000 for a longer period of time, you might end up paying more interest overall, despite paying a lower rate, as this table illustrates.

	Unsecured loan	Secured loan
Interest rate	10%	6%
Loan term	5 years	10 years
Monthly payment	£210.36	£110.22
Total interest payable	£2,621.35	£3,226.88
Total loan cost	£12,621.35	£13,226.88

On the other hand, when you compare the same loan term, an unsecured loan is more expensive overall.

	Unsecured loan	Secured loan
Interest rate	10%	6%
Loan term	5 years	5 years
Monthly payment	£210.36	£192.59
Total interest payable	£2,621.35	£1,555.39
Total loan cost	£12,621.35	£11,555.39

Unsecured loans are more expensive than 0% cards where the balance is paid off within the interest-free period. But they’re generally cheaper than standard credit cards, which have rates of around 22-25% APR.

Of course, the cheapest option is to save up rather than borrow. That’s if you can afford to wait.

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 there’s no asset acting 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 than someone with a good credit score, to reflect the higher risk to the lender.

Alternatives to unsecured loans

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

Secured loan – you may be able to borrow money using your home or car as security. If you can’t pay back your loan, the lender can take possession of your asset.
Guarantor loan – this is when a friend or relative guarantees to pay back the loan if you can’t. If your guarantor has to step in, it could hurt your credit score even further.
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. This shows you can be responsible. The maximum spend limit is usually much lower than other credit cards – typically £100 to £1,200.
Use your savings – could you cover the cost of your expense with your savings while still having enough cash left over for emergencies? The interest on a loan is likely to be higher than you currently earn on your savings.
Borrow from family or friends – you can avoid paying expensive interest charges or damaging your credit score. Just make sure you’re both clear about the repayment plan to avoid any disagreements further down the line.

Compare with us and look for a loan to suit you

Use our loans eligibility checker to find the loans that you’re likely to be accepted for. You’ll need to give us a few details about you and your finances. We’ll then run a soft credit check, which doesn’t go on your credit record.

You’ll be able to see any age criteria, whether repayment holidays are allowed and if you can use the loan for debt consolidation.

If you decide to formally apply for a loan, the lender will run a hard credit check, which will appear on your credit report.

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.

Frequently asked questions

What happens if you don’t pay an unsecured loan?

If you miss a monthly repayment, your lender may charge you a late payment fee.

Missed payments will also be recorded on your credit report, which could harm your credit score. If the debt continues to go unpaid, the lender could start court proceedings against you.

If you’re struggling financially, speak to your lender as soon as possible and get some independent debt advice. It may be possible to restructure your loan or get a temporary payment holiday.

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.

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

If a lender turns down your loan application, 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 score to reduce the chance of being turned down for a second time.

Firstly, 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. They are: