An unsecured loan is a loan that doesn’t require any type of collateral – allowing you to borrow a fixed amount without needing an asset, such as your home, as security.
Here we look at:
How does an unsecured loan work?
Types of unsecured lending
What are the benefits of unsecured loans?
Things to consider before taking out an unsecured loan
Do unsecured loans affect your credit score?
How does an unsecured loan work?
When you take out an unsecured loan, you borrow money from a lender, such as a bank.
You’ll agree to make regular monthly repayments over a set period – until the loan (plus any interest owed) is repaid in full.
You can typically borrow between £1,000 and £25,000 on an unsecured loan but different lenders may have different limits.
When you apply, your creditworthiness and other factors will be considered. For example, a lender will decide if they’re willing to lend to you, how much, and at what interest rate, based on things like:
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Your income
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Your credit score
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What you need the loan for
It’s important to only borrow what you can afford to pay back and make sure you can keep up with the repayments to avoid fees and charges.
Types of unsecured lending
Examples of unsecured lending include:
A personal loan can be helpful if you need to borrow money to renovate your home, buy a car, pay for a wedding, or consolidate debts, for example.
A credit card or overdraft may be more suitable for short-term borrowing.
What are the benefits of unsecured loans?
You don’t need an asset as collateral
Unsecured loans are approved without the use of property or other assets as collateral. This means the lender can’t take away any of your assets, such as your home if you fail to repay what you owe.
Quick access to funds
As a mortgage valuation isn’t required, applications for unsecured loans are completed faster than secured loans. So, you can make your plans a reality sooner.
You can expect to receive your loan money within 1 to 7 working days, depending on the bank and whether you have an account with them.
Flexibility
You can choose how long you want to take to repay the loan. This is usually between 1 and 8 years, depending on how much you borrow. Many lenders also give you the option to top up your loan.
Explore: Secured vs unsecured loans explained
Things to consider before taking out an unsecured loan
Interest rates tend to be higher
Unsecured loans are typically seen as higher risk for a lender, compared to secured loans. Because a lender only has your creditworthiness and your word as a guarantee that you’ll repay the debt, interest rates tend to be higher on unsecured loans than on secured loans.
It’s difficult to get an unsecured loan with poor credit
Your credit history is an important factor in a lender’s decision to accept an application. You’re more likely to get approved with a good credit score and more likely to get declined for lending if you have a poor score.
Explore: How to improve your credit score
You’ll need to afford the loan repayments
Any late or missed repayments can result in fees and charges, as well as negatively impact your credit score and your ability to borrow money in the future. Before you apply, make sure you can afford the repayments for the full term of the loan.
Use our personal loan calculator to look at how much your repayments could be and how that may impact your budget.
Do unsecured loans affect your credit score?
Unsecured loans can affect your credit score and appear on your credit report.When you first apply for a loan, your credit score may drop temporarily, but by managing your loan responsibly and repaying it on time, you can gradually improve your score.
Missed or late loan repayments can negatively impact your credit score.
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