Unsecured personal loans

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What is an unsecured personal loan?

An unsecured loan, also known as a personal loan, allows you to borrow money from a bank or other lender. There’s no need for you to provide any kind of asset, such as your home, as security (unlike with a secured loan).

How do unsecured loans work?

When you apply for an unsecured loan, the lender will look at your financial status and credit history to work out how much of a risk you might be.

As you don’t have to offer up anything as security, the lender needs 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 can typically borrow between £1,000 and £25,000, although Compare the Market looks at unsecured loans up to £50,000. Unsecured personal loans are usually paid back over one to five years, but can go 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’s the difference between unsecured and secured loans?

An unsecured loan doesn’t require any security from you in case you can’t repay what you owe, whereas a secured loan does. This will often be your home or, in the case of some car loans, your vehicle.

While this makes an unsecured loan less of a risk for you as the borrower, it’s the opposite case for the lender. To reflect this, the sums you can borrow are smaller and must usually be repaid over a shorter period compared with a secured loan.

Also, interest rates are typically higher with an unsecured loan. And you’ll need an excellent credit score to get the best rates.

What can I use unsecured loans for?

Lenders will usually ask why you want to borrow. Loans are often used to spread the cost of a big expense that can’t be covered with savings, including:

Home improvements – such as a new kitchen or bathroom. You might also want a loan to maintain your property. For example, to replace the roof
A used or new car – you might choose to use a personal loan rather than a car finance plan
An expensive emergency repair – such as a new boiler or major repairs to your car.

Another reason to take out an unsecured loan is to bring together existing debts, such as credit cards or overdrafts, you may have elsewhere. Typically called a debt consolidation loan, this lets you pay off what you owe to different lenders by combining the debts into one single – potentially lower – monthly payment.

But be aware that taking on a new loan to pay off old debt is a big decision. You could end up paying more in interest over the long term. And if you’re paying off any existing loans as part of the consolidation, you could also face early repayment charges.

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, an unsecured loan can be a good way to fund a major purchase. Your monthly repayments are fixed, which can make budgeting easier.

But interest will be added to your loan, so explore whether you might be better off with a 0% purchase credit card.

This type of card lets you make an expensive purchase upfront, then pay off what you’ve spent over a set period without paying any interest (provided you keep up with the minimum repayments). Just remember that you’ll need to pay off what you owe before the end of the 0% period, or you’ll be charged a high rate of interest.

You should think carefully before taking on any form of debt. And only borrow what you can comfortably afford to pay back.

If you repeatedly miss your loan repayments, it could damage your credit score, making it harder for you to get credit or a loan in the future. And the lender could begin debt collection proceedings or take court action against you.

Can I get an unsecured loan?

Your application for an unsecured personal loan is more likely to be approved 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 use this to check your identity and may refuse your loan application if your name isn’t on the register. Sometimes lenders will accept additional proof of a new address if you’ve just moved. This could be a utility bill, tenancy agreement or mortgage details
Are employed: if you have a job, 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, use our eligibility checker to see which loans you’re likely to be accepted for without any impact on your credit score.

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 – the money could be in your bank account within days (or even hours) of being approved
Wide choice – you can compare to get the best unsecured personal loan rates
No need for security – you don’t have to use an asset, such as your home or car, to be able to apply
Fixed payments – your monthly repayments are set for the length of the loan, so you’ll know exactly how much you must pay back each month
Potential to boost your credit score – paying on time and in full every month could improve your rating.

What are the cons of an unsecured loan?

The negatives of an unsecured loan include:

Higher interest rates – you’ll typically pay a higher rate of interest compared to a secured loan
Fees and charges – you might have to pay an early repayment charge (ERC) if you pay off your loan early. And you’ll typically be charged a fee for any missed payments
Tough eligibility criteria – if you have a poor credit rating, it can be harder to get accepted
Risk to your credit score – if you fail to make your repayments on time, you’ll damage your 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 get, how much you borrow and for how long.

For example, if you borrow £10,000 with an unsecured loan and repay it in half the time taken for a secured loan, you might end up paying less interest overall. That’s despite paying a higher rate of interest, as this table illustrates.

	Unsecured loan	Secured loan
Amount borrowed	£10,000	£10,000
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 cost over the same loan term, an unsecured loan is more expensive overall.

	Unsecured loan	Secured loan
Amount borrowed	£10,000	£10,000
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 using a 0% purchase credit card where the balance is paid off within the interest-free period.

Use our loan calculator to help you work out how much your monthly loan payments might be and what a loan could cost overall.

Can I get an unsecured loan with bad credit?

It’s not impossible to get unsecured loans for bad credit, but it’s likely to be more difficult.

Because you’re not offering up any kind of asset as security, lenders may be more reluctant to offer you a loan. You might also have to pay a higher rate of interest than someone with a good credit score, to reflect the higher risk to the lender.

Loans for poor credit may also restrict how much you can borrow and for how long.

What are the alternatives to an unsecured loan?

Consider these alternatives to an unsecured loan:

Secured loan – you’ll need to put up an asset, such as your home or car, as security. The lender can take possession of it if you can’t repay
Guarantor loan – if you’re unable to pay back the loan, a friend or relative guarantees to do it for you
0% purchase credit card – ideally, you should pay off what you owe before the end of the 0% period and meet the minimum monthly repayments
Credit unions – you could be offered a loan at an affordable rate. A credit union can be locally based or for workers in particular companies, industry sectors or unions
Peer to peer loan – borrow money from an individual or group of people, instead of from a financial institution. You can’t compare peer-to-peer loans with Compare the Market
Your savings – could you cover the cost of your expense with your savings, while still having enough cash left over for emergencies?
Family or friends – you can avoid expensive interest charges or the risk of damage to your credit score. Just make sure all of you are clear and upfront about your repayment plan to avoid any disagreements further down the line.

Compare personal unsecured loans with us

Use our loans eligibility checker to find out which loans you’re likely to be accepted for. We’ll then run a soft credit check, which doesn’t show up on your credit record and won’t affect your credit score.

From the results, 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 loan repayment, you may be charged a late payment fee.

Missed payments will also be recorded on your credit report, which could harm your credit score. If the loan 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. 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. This will ensure your monthly repayments are made automatically in future.

If you’re struggling with debt, organisations such as Citizens Advice and StepChange Debt Charity can offer free non-judgmental advice.

You can also find more information in our guide How to get out of debt.

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

If a lender turns down your loan application, you can ask them if there’s a particular reason why. It may be that your credit score isn’t high enough or you don’t meet the lender’s affordability criteria.

Look up your credit report to make sure the details are correct. You can check your credit report for free.

There are three main credit reference agencies (CRAs):