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How to get an unsecured loan

How to get an unsecured loan

Borrow from £1,000 up to £25,000 and make fixed repayments each month. Unlike a secured loan, or homeowner loan, your home is not used to guarantee payments.

  • Unsecured loans normally have fixed interest rates for easy budgeting.
  • You’ll need a decent credit score to get the advertised interest rates
  • Compare unsecured loans with secured loans and credit cards.

What is an unsecured personal loan?

Unsecured loans, or personal loans, are commonly taken out by people who want to finance bigger purchases, such as a car or home improvements. This type of loan can also be used to consolidate debts.

Unsecured loans are normally for smaller amounts than secured loans but you won’t be required to secure the loan against your property.

How do unsecured loans work?

Unsecured loans are normally for amounts from about £1,000 up to £25,000.

When you take out an unsecured loan, the cash lump sum will be paid into your bank account. You’ll then repay it each month, plus interest, for a term of between one and seven years. Missed or late payments can affect your credit rating.

An unsecured loan may be cheaper than an overdraft or credit card.

The interest rate you’ll be offered will depend on:

  • the amount you borrow
  • your personal circumstances
  • your credit rating
  • the term over which you’ll pay the money back

Is an unsecured loan right for me?

An unsecured loan might be right for you if you:

  • don’t own a property
  • own a property but don’t want to secure borrowing against it
  • need to borrow a relatively small sum of money
  • want to repay the money in fixed monthly repayments over 12 months to seven years
  • have a good or excellent credit score

Unsecured loans are often advertised with low headline rates that can make them look very cheap — but you could be offered a higher rate if your credit score isn’t perfect.

Check your credit report

You should check your credit report before making an application for an unsecured loan.

If you see any incorrect information, you can raise a dispute by selecting the ‘Raise a dispute’ option against the appropriate section of your credit report.

What to watch out for

Is an unsecured loan different to a secured loan?

Yes, an unsecured loan is different to a secured loan.

Secured loans are often the cheapest option but you’ll be required to put something forward as security for the debt. This is usually your home, assuming you own it (either outright or with a mortgage). The lender can ultimately take possession of your home if you don’t repay the loan.

With an unsecured loan, you are not required to offer anything as security for the money. This means they are more risky for lenders and so interest rates are often, but not always, a bit higher.

Unsecured loans also tend to be for shorter terms than secured loans, and for lower amounts.

Wherever possible you should opt for an unsecured loan over a secured loan.

What is an unsecured loan cooling-off period?

When you take out an unsecured loan you will have a 14-day cooling-off period from either the date the loan agreement is signed or when you receive a copy of the agreement, whichever is later.

If you cancel during the cooling-off period and have already received the funds, you have up to 30 days to repay the money in full.

However, you’ll be charged interest for the time period you had the credit. But any additional fees you paid will be refunded.

Are there early repayment penalties on an unsecured loan?

You might be charged early repayment penalties on an unsecured loan if you:

  • want to pay more off your loan each month than your set monthly payment
  • want to pay off the entire loan before the end of the term 

Early repayment penalties are normally equal to one or two months' interest. Lenders charge these fees because if you pay back the loan early, they lose out on the interest you would have paid.

In some cases even with the early repayment charges, you may be better off paying back the loan more quickly.

Some loan providers don't charge early repayment penalties at all.

What happens if I miss a payment on an unsecured loan?

It is important to keep up with your repayments on an unsecured loan. If you miss a payment, you may be charged a penalty fee.

The loan provider might also pass the details of your missed payment to a credit reference agency so that it shows on your credit record. This could affect your chances of getting credit in the future.

Even though unsecured loans don’t require you to put up any security, the lender still has a legal right to get its money back if you don’t repay it.

In the worst case scenario, non-repayment of an unsecured loan can mean you are issued with a county court judgement (CCJ), or have to declare yourself bankrupt. Both of these scenarios will have a serious impact on your credit record and your ability to borrow money in the future.

How to apply for an unsecured loan

Who offers unsecured loans?

Unsecured loans are offered by:

  • banks
  • building societies
  • credit unions
  • guarantor loan companies
  • peer-to-peer lenders

You can normally apply for an unsecured loan in person, online or over the phone. You will typically need the following information:

  • details of your home addresses from the past three years
  • your bank account details
  • details of your employer and salary

How much will a personal loan cost me?

Unsecured loans are advertised with a ‘representative APR’. But you might not be offered this rate — especially if you don’t have a perfect credit record.

Legally, loan providers only have to offer the advertised rate to 51% of people who apply for, and are accepted for, a loan.

So you might be offered a higher interest rate than advertised.

Being rejected for a loan can make it harder to be accepted for credit in the future. So, when one lender says no, they often all do. TotallyMoney’s eligibility checker lets you know if you’ll be accepted — with no harm to your credit rating.

Some unsecured loans come with arrangement fees. These will make a loan more expensive.

Arrangement fees will be included in the APR. This is why you should compare APRs instead of just interest rates when choosing a loan.

Some unsecured loans have fixed (guaranteed) interest rates while others variable interest rates, meaning they can go up or down.

If you want to know for sure how much you will need to repay each month you should opt for a loan with a fixed interest rate.

Some lenders operate a ‘tiered interest rate’ system for unsecured loans. This means the interest rates on a personal loan may vary depending on how much money you want to borrow. You'll normally be charged a higher interest rate for smaller loan amounts.

Shop around for the best unsecured loan deals

You should compare unsecured loan interest rates and terms from different lenders.

The interest rate on a personal loan may vary depending on:

  • how much you want to borrow
  • your credit rating
  • the term
  • the loan provider
  • your income and personal circumstances

The longer you have to pay back your personal loan, the lower your monthly payments will be. But a longer term means you’ll end up paying more interest overall.

It’s important to check that you can afford the repayments on any loan you take out over the whole term of the loan. If you fail to make repayments it can affect your credit score.

Unsecured loan vs credit cards

If you want to borrow a relatively small amount, it may be cheaper to borrow on a credit card than take out an unsecured loan. A credit card is also a type of unsecured borrowing.

A credit card might be cheaper because APRs on unsecured loans are normally higher for small amounts than larger amounts. For example, if you take out a loan for £1,000, the interest rate will probably be higher than if the loan amount was £5,000.

Credit cards work in a different way to unsecured loans. They don’t have fixed repayments — you can pay back as much as you like each month as long as you make at least the minimum repayment. Wherever possible though you should try to repay more than the minimum amount otherwise this becomes a very expensive way of borrowing.

If you think a credit card would be a better option, TotallyMoney has a credit card checking tool, to help find the best card for you. It shows you your likelihood of acceptance before you apply.


Pros and cons of unsecured loans

Pros

  • there is usually more choice of unsecured loans than secured loans
  • your home or other asset is not at risk with an unsecured loan
  • you can choose a loan term to suit your budget
  • fixed interest rates and set repayments can help you manage your budget
  • applications can be approved more quickly because the lender doesn’t need to check the value of your propert
  • rates can be competitive, especially if you borrow more than £7,500

Cons

  • the maximum loan amount may be less than on a secured loan
  • the interest rates on loans for smaller amounts can be uncompetitive
  • you need a good credit score to be eligible for headline interest rates
  • credit cards may be a cheaper way to borrow in some circumstances
  • If you get behind with repayments this can affect your credit score.

As with all lending, always make sure you only borrow what you can afford to repay over the whole term of the loan.

Check your loan deals

Find the loans you’re most likely to be accepted for. You could even be pre-approved.

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