Unsecured loans offer a way to borrow money without having to put forward your home or any other asset as security for the loan. They are also known as personal loans and often used for big purchases, covering emergency expenses or consolidating debt. Read on to learn more.
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How do unsecured loans work?
Most unsecured loans work in a similar way. You agree with a lender a loan amount and a loan term over which you’ll repay the loan, plus the interest you’re charged. You’ll then be expected to make repayments to the lender every month until the end of your agreed loan term. At this point everything you owe should be cleared as long as you have maintained your repayments.
Unsecured loan interest rates are usually fixed. This means the amount you must repay each month will stay the same for the duration of the loan term.
How much can you borrow?
Unsecured loans tend to be available for between £1,000 and £25,000, though some lenders might allow you to borrow up to £50,000 or even more. Higher limits may also be available if you’re an existing customer of a bank or lender.
How much you’re allowed to borrow specifically will depend on your financial situation and the repayments a lender thinks you’re able to afford. How you intend to use the loan might also affect the amount you can get.
You may only be offered the maximum loan amount if you have a good financial standing and credit score, and can prove that you’re able to easily afford the repayments required.
Using a personal loan calculator can help you work out what you might be able to borrow and the monthly repayments you might need to make.
How long can you get an unsecured loan for?
Typically, unsecured loans are available for terms of between one and seven years, or sometimes longer. You can choose the term that suits you, although the range available can vary depending on the amount you want to borrow.
Unsecured loan pros and cons
There are various advantages of unsecured loans, but some potential disadvantages to be aware of too.
Advantages
Some of the potential benefits of unsecured personal loans include that they:
- give you choice and flexibility over the loan amount and term
- can be used for a wide variety of purposes
- don’t require you to put forward an asset as security for the loan
- usually have a fixed interest rate, giving certainty over monthly repayment amounts
- can usually be applied for quickly, with lending decisions made in minutes
- will often deliver funds to your account the same or next day
- tend to be more widely available than secured loans
Disadvantages
Some of the potential drawbacks of unsecured loans include that they:
- may charge a fee if you want to repay the loan early
- might require you to have a certain level of income to be eligible
- may be more difficult to get with bad credit or if you’re self-employed
- might not be available to you if you have a CCJ or have been declared bankrupt
- can’t be used for certain purposes, such as for buying property, investing or business reasons
- often have higher interest rates than an equivalent secured loan
- tend to offer smaller loan amounts and shorter repayment periods than secured loans
How much do unsecured loans cost?
Unsecured loan rates can differ between lenders. Interest rates can also vary according to the amount you want to borrow and for how long.
The interest rate you’re ultimately offered will also depend on your credit score and personal circumstances. Lenders look at your credit history to try to work out how much of a risk they are taking on if they lend to you. Generally, the best unsecured loan rates will be reserved for borrowers that a lender considers to represent the lowest risk.
You can see how much an unsecured loan may cost over one year by looking at the advertised APR. This figure includes interest charges as well as any fees, which makes it easier to compare the costs of loans from different lenders. The advertised APR is known as the representative APR and is the rate the lender expects to offer to at least 51% of applicants. Your personal APR may be higher or lower depending on your credit score and financial situation.
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What unsecured loans can be used for?
Unsecured loans can be used for a wide range of purposes including:
- buying a car
- making home improvements
- consolidating existing debt
- paying for holidays and weddings
What can’t unsecured loans be used for?
There are some things that unsecured loans can’t usually be used for, including:
- for timeshares or holiday clubs
- for business purposes
- for investing, including to buy stocks and shares
- to buy property or land
- as a deposit for a mortgage
- to cover gambling debts
- for repaying a county court judgment (CCJ)
- to help purchase something in combination with another loan
Can I get an unsecured loan?
Different lenders have their own eligibility criteria for unsecured loans, but generally you’ll need to be a UK resident and hold a UK bank or building society account that can pay direct debits.
Some lenders require that you’re at least 18 years old, while others have a minimum age of 21. There might also be an upper age limit that you’re not allowed to go beyond by the time the loan term ends.
To help prove a loan is affordable, you’ll need to have a regular income above a minimum level – this can vary between lenders. While some lenders prefer this income to come from paid employment or a pension, others also welcome loan applications if you’re self-employed and can provide sufficient proof of regular earnings.
You may also need to prove that you don’t have a history of CCJs, individual voluntary arrangements (IVAs) or bankruptcy. If you do, and your credit score has been negatively affected, you’re likely to find it more difficult to get approval for an unsecured loan.
Do you need a good credit score for an unsecured loan?
Having a good credit score could improve your chances of getting approval for an unsecured loan and of qualifying for some of the best unsecured loan rates. There are also some lenders that specifically state you should have a good credit score if you want to apply for their loans.
However, having a less than perfect credit score doesn’t necessarily mean you won’t be able to get an unsecured loan. It’s likely to prove more difficult to get an unsecured loan if you have bad credit, but there may still be loan options available. Indeed, some lenders specialise in offering bad credit loans to those with poor credit scores.
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How do I apply for an unsecured loan?
Applying for an unsecured loan can be relatively straightforward if you meet the eligibility criteria for the loan and have certain information to hand. Typically, you’ll need to have ready:
- your personal details, including name, address and contact details
- proof of your identity, in the form of your driving licence or passport, and/or a bank statement or utility bill
- details relating to your financial situation, such as your monthly income and expenditure
- your employer’s address, if you’re employed
- your most recent accounts, if you’re self-employed
- details of any other loans or credit arrangements you might have
- your bank details
You should also be prepared for a lender to ask permission to conduct a hard credit check. This has the potential to affect your credit score, but is a necessary part of applying for a loan.
All of this information and your credit history will be used by the lender to determine whether you should be offered a loan and the interest rate you’d need to pay if you are.
» MORE: How to apply for a loan
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