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Unsecured personal loans

An unsecured personal loan is 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 other asset as collateral, as you would with a secured loan. Find out more in our guide to unsecured personal loans.

What is an unsecured personal loan?

An unsecured loan, more commonly known as a personal loan, is an agreement or contract between you and a lender. It can be used to spread the cost of an expensive purchase or even combine your debts.

You’re allowed to borrow the money on the basis that you agree to pay back your unsecured loan in monthly instalments within the agreed timeframe, together with any interest owed.

With unsecured personal loans, you don’t have to offer up your home or other asset as collateral in return for the money – hence the term ‘unsecured’ – so lenders need to be confident you can repay what you owe.

When you apply for a loan, 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 debt based on your financial circumstances.

What’s the difference between unsecured and secured 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.

A secured loan is considered less of a risk for the lender because they’ll be able to take possession of your asset if you fail to repay the loan. Because the stakes are higher, you can normally borrow larger sums of money over longer periods with a secured loan, with potentially lower interest rates too. But you could end up paying more interest overall if you spread your payments over a long timeframe.

Should I choose an unsecured loan?

An unsecured loan can be a flexible way of getting money that a credit card alone can’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.

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.

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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:

  • Fast access to funds – you’ll have the money in your bank account within days (or even hours) of being approved.
  • Widely available – you don’t have to be a homeowner and offer up your property as collateral, nor get someone to guarantee the loan for you.
  • Flexible repayments – you’ll usually have a choice of how much you want to borrow and the length of time you want to pay back the money.

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.
  • 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 if you miss a payment or default on your debt altogether.
  • Tough eligibility criteria – because of the risks to the lender, it can be harder to get accepted for an unsecured loan, plus the best interest rates will be reserved for people with a good or excellent credit rating.

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, 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. 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 rather than a car finance plan to buy a car.
  • An expensive purchase, like a new boiler or major car repairs.
  • 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 thinking of getting a loan to pay for day-to-day expenses and outstanding bills, you should consider getting free debt advice to help you get your finances back on track.

What happens if I miss a loan repayment?

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

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. Whatever you do, don’t ignore the problem and hope it will go away.

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.

Even though unsecured loans don’t require you to offer any security, you are still obliged to repay the debt and the lender is entitled to take steps against you to recover that debt. This might include bringing court proceedings against you, which could result in a CCJ or other legal action.

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

If your loan application is rejected, 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. They are:

  • 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.

Comparethemarket 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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