Unsecured Loans

Find out how unsecured loans work and why they’re different from secured loans. See if an unsecured loan is right for you and search the market for the best deal.

What is an unsecured loan?

An unsecured loan is also called a personal loan. Like any type of loan it lets you borrow a lump sum of money. You make monthly payments to repay the money plus interest and any fees that the lender charges. Unlike a secured loan, an unsecured loan doesn’t put your home at risk.

What can I use my unsecured loan for?

Pretty much anything! You don’t have to tell your lender why you want an unsecured loan. But it’s wise to have a clear reason so you don’t waste the money on something unnecessary.

People often use an unsecured loan to spread the cost of a large, one-off expense such as a wedding, new car or home improvements. Unsecured loans may also be used to consolidate debt which means moving multiple debts to one account. This may help you simplify payments and reduce interest, although it isn’t right for everyone.

You can’t use an unsecured loan to pay for something illegal. Also, lenders may say you can’t gamble with the money. Check the terms of your loan agreement to be sure.

What is the difference between unsecured and secured loans?

One key difference is that a secured loan is tied to your property. If you don’t keep up with the loan repayments, your lender can sell your home to get its money back.

You don’t have to risk your home with an unsecured loan. But lenders often find other ways to reduce the risk for themselves. This is why unsecured loans tend to have higher interest rates, lower borrowing amounts and shorter terms than secured loans.

What are the advantages of an unsecured loan?

Choosing between unsecured and secured loans? Most secured loans require you to be a homeowner, and it may be harder to get approved if you still owe a lot on your mortgage. With an unsecured loan, you don’t have to own property or put your home at risk.

What’s more, an unsecured loan may be the better option if you want to borrow a smaller amount or borrow for a shorter period of time. They can be cheaper and simpler to set up as well.

Compared to credit cards, unsecured loans may offer lower rates. They also have a more structured payment plan, which may be an advantage if you want to pay off the debt by a certain date. Unsecured loans are a lot cheaper and safer than payday loans.

What are the disadvantages of an unsecured loan?

Unsecured loans often have higher interest rates than secured loans. You may need a good credit score to be approved and get a decent rate. A secured loan may be the better option if you want a long-term loan or to borrow a larger amount.

Unsecured loans aren’t as flexible as credit cards, as cards give you more control over how much you pay each month. Rewards cards may offer perks you won’t get with a loan (such as cashback, points and air miles). Consider a purchase card if you want to spread a big expense or a balance transfer card if you want to consolidate debt. These cards often have an interest-free period.

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Are unsecured loans more expensive?

Although unsecured loans tend to have higher rates than secured loans, this doesn’t always mean they’re more expensive. The cost of a loan depends on several things including the rate, how much you borrow, and how long the loan lasts.

Here are some simple examples below to show you what we mean.

First let’s compare interest rates. The loans below are for the same amount and have the same term but have different interest rates. The unsecured loan costs £1,425 more because it has a higher rate.

Unsecured loanSecured loan
Interest rate10%5%
Amount borrowed£10,000£10,000
Loan term5 years5 years
Monthly payment£212.47£188.71
Interest paid overall£2,748.23£1,322.74

Next let’s compare loan amounts. The loans below are the same except for their size. The unsecured loan is £1,374 cheaper because a smaller amount was borrowed.

Unsecured loanSecured loan
Interest rate10%10%
Amount borrowed£5,000£10,000
Loan term5 years5 years
Monthly payment£106.24£212.47
Interest paid overall£1,374.11£2,748.23

Finally let’s compare the loan term. The unsecured loan below has higher monthly payments. But it costs £3,110 less overall because you make payments for half as long.

Unsecured loanSecured loan
Interest rate10%10%
Amount borrowed£10,000£10,000
Loan term5 years10 years
Monthly payment£212.47£132.15
Interest paid overall£2,748.23£5,858.09

Can I get an unsecured loan with bad credit?

It’s possible to get approved even if your credit score is lower than you’d like. Look for lenders who offer unsecured loans for bad credit and consider asking someone to be your guarantor.

Find out what to do if you’re refused credit and learn how to improve your score to increase your chances of approval.

What should I consider before getting an unsecured loan?

Taking out an unsecured loan is a big deal. Think carefully about your reasons and how you’ll manage the repayments. Here are a few important questions to ask yourself:

  • Why do I need a loan? Only borrow for necessary expenses and things that’ll leave you better off in the long run. Ask yourself if it’s better to wait and save up.
  • Can I afford the payments? Fitting the repayments into your monthly budget shouldn’t be a squeeze. Missing payments lowers your credit score and can lead to fines, defaults and even legal action.
  • Have I considered my alternatives? See if another type of credit would suit you more, such as a secured loan, credit card or arranged overdraft.

Where can I get an unsecured personal loan?

Find the best offers before you apply for a loan. Search unsecured loans from across the UK market with Experian. It’s free, takes a few minutes and never hurts your credit score. Also, we calculate your chances of approval so that you can skip the guesswork and apply with confidence.

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We're a credit broker not a lender†