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What are Unsecured Loans?

Unsecured loans are the most common kind of loan in the UK, including overdrafts, credit cards and more. Read this helpful article from Consolidation Express.
A woman holding an open padlock.

If you’re reading this, you may be considering taking out a loan. But where do you start?

Unsecured loans can be a great option for those who don’t have any collateral to secure against a loan or for those who don’t want the risk of losing their assets.

In this article, we’ll dive into what unsecured loans are, how they work, and some things to consider before you choose one.

What is an Unsecured Loan?

An unsecured loan is a type of loan that does not require the borrower to put up any collateral, such as a home or car, to secure the loan. This means that if the borrower is unable to repay the loan, the lender will not be able to seize any assets as recompense.

Unsecured loans, or personal loans as they are often called, are often approved based on numerous factors including:

  • borrower's credit score
  • borrowers age
  • borrower’s credit utilisation ratio

Unsecured loans are paid typically back via monthly repayments, making them a convenient option for many UK citizens.

There are many different types of unsecured loans, including credit cards, overdrafts, and payday loans, all of which will have an impact on a borrower’s credit report. In the case that an unsecured loan is paid back in a timely manner and in full, the loan could positively impact a borrower’s credit score. However, if payments are missed, these types of loans will negatively affect a borrower’s credit score.

What can Unsecured Loans be used for?

Unsecured loans can be used for a variety of purposes, including consolidating debts, making home improvements, paying for a wedding or vacation, and much more.

Because unsecured loans are not tied to any particular asset, they can be used for almost anything. The choice of how to spend an unsecured loan lies solely with the borrower.

What is an example of an Unsecured Loan?

One of the most common examples of an unsecured loan is a credit card. Credit cards are an example of an unsecured loan because they are not tied to any specific asset. When you use a credit card, you are borrowing money that you will eventually have to pay back, with added interest. If you can’t pay your credit card bill, the issuer can’t take your house or car away from you to compensate for missing payments.

Another common type of unsecured loan is a personal loan from a bank. Personal loans are often given by banks, credit unions, and online lenders and can be used for a variety of purposes. Like credit cards, personal loans are not secured by any particular asset – meaning that your property or vehicles aren’t at risk if you fail to pay the debt back.

What is the difference between Secured and Unsecured Loans?

An image of a balancing scale. One side labelled secured and the other side labelled unsecured.

The main difference between secured and unsecured loans is that secured loans are backed by collateral, while unsecured loans are not. This means that if you default on a secured loan, the lender can seize the collateral (usually your home or car) to recoup their losses.

With an unsecured loan, there is no collateral at risk, so if you default, the lender will likely just write the debt off as a loss. Therefore, unsecured loans tend to have higher interest rates than secured loans as the lender is taking on more risk by lending money without any collateral to back it up.

How much money can you borrow unsecured?

The amount of money you can borrow with an unsecured loan will depend on several factors, including your credit score, income, and employment history. That said, most lenders will offer loans of up to £50,000 for qualified borrowers. However, you would need to have an excellent credit score to qualify for a loan of this type.

All in all, there is no set amount that you can borrow with an unsecured loan. The amount approved is completely up to the lender’s digression.

Is a car loan Secured or Unsecured?

Car loans are typically secured loans, which means that they are backed by collateral. This collateral is usually the car itself – meaning that if you default on the loan, the lender can seize the car to recoup their losses.

There are some unsecured car loans available, but they are much less common. These loans tend to have higher interest rates and are only available to those with higher credit ratings.

Should I take a Personal Loan out to buy a car?

Whether or not you should take out a personal loan to buy a car depends on several factors:

01. Factor one

You need to consider the interest rate – if the interest rate on the loan is higher than the interest rate you can get from a traditional auto loan, it probably doesn’t make sense to take out the personal loan.

02. Factor two

You need to consider the term of the loan. Personal loans are typically given in terms of three to five years, while auto loans are typically for five to seven years. This means that you’ll end up paying more interest on a personal loan over the life of the loan.

03. Factor three

You need to consider your credit score. If you have good credit, you can probably get a lower interest rate on an auto loan than you would on a personal loan. However, if your credit score is poor, a personal loan may be your only option.

In a nutshell,

taking out a personal loan to buy a car is only a good idea if you can get a lower interest rate than you would on an auto loan. Otherwise, you’ll end up paying more interest over the life of the loan.

Is a Mortgage Secured or Unsecured?

Mortgages are secured loans, which means that they are backed by collateral. The collateral for a mortgage is usually the home itself – meaning that if you default on the loan or miss multiple payments, the lender can seize the home to recover their losses.

What type of Personal Loan is without Collateral?

An unsecured personal loan is a type of loan that does not require collateral. Collateral is something of value that can be used to secure a loan – usually, this means your home or car.

Is it mandatory to pay interest on an Unsecured Loan?

Yes, it is mandatory to pay interest on an unsecured loan unless you want the credit provider to report you to the relevant authorities – which will have a serious impact on your credit score.

The interest rate is the main benefit to the lender in offering you an unsecured loan in the first place, and as such, failing to pay the interest rate may result in the credit agreement being marked as unpaid on your credit report.

How long before Unsecured Debt is written off?

Unsecured debt is usually written off after six years, providing it meets specific criteria. This means that if you have unsecured debt that you have not paid off in six years, the lender may write it off and no longer attempt to collect on the debt.

For your debt to be written off, it must be:

  • At least six years old.
  • Must have not been noted in written correspondence for at least six years.
  • Must not have a CCJ against it.
  • Must not have a CCJ against it.

Does it hurt to pay off a loan early?

If you choose to pay off a loan early, you could be charged an early repayment fee, which will often be a percentage of the overall loan. Additionally, you may not be able to take out another loan with the same lender for a certain period.

Are Student Loans Secured or Unsecured?

Student loans are unsecured loans, so your property isn’t at risk if you’re unable to pay them back. It is likely that you’ll be paying your student loans in the UK off for many years, but this doesn’t need to be a burden. There are many options available to help you manage your student loan repayments, so you can focus on your studies and career.

An image of a piece of paper with the headings Pros and Cons.

What is the main advantage of an Unsecured Loan?

The main advantage of an unsecured loan is that you don’t need to put up any collateral. This means that you’re not at risk of losing your home or car if you can’t repay the loan. You also don’t need to have a home or a vehicle to borrow money through an unsecured loan.

What are the disadvantages of Unsecured Loans in the UK?

The main downside of unsecured loans is that they often come with higher interest rates than secured loans since the lender is taking on more risk. This means that borrowers will need to be careful about how much they borrow and make sure that they are prepared to make higher repayments.

Are Unsecured Loans safe?

Unsecured loans are safe if you borrow from a reputable lender and carefully consider how much you can afford to repay. Be sure to read the terms and conditions of your loan agreement carefully before signing anything, and always make your repayments on time to avoid damaging your credit score.

While you aren’t at risk of losing your home or vehicle if you can’t repay your unsecured loans, they can still damage your credit rating. Additionally, you can also be legally pursued by the borrower, who may pass the unpaid loan onto a debt collection agency.

A credit score and a big question mark.

Do Unsecured Loans hurt your credit?

Your credit score may be impacted if you miss payments on your unsecured loan, as this will be reported to the credit agencies. If you default on the loan, this will also be recorded on your credit file and therefore hurt your credit score.

However, if you make all of your repayments on time and in full, an unsecured loan can actually help to build your credit and show that you are a trustworthy lender. This could make it easier to be approved for other types of loans, including secured and unsecured loans.

Who can get an Unsecured Loan?

Technically anyone can be approved for an unsecured loan, as every lender’s approval criteria are different. However, it is easier to get an unsecured loan if you have a good credit score. This is because it shows lenders that you’ve managed your finances well in the past and have a history of making repayments on time.

Additionally, you will also find it easier to be accepted for an unsecured loan if you can provide you have a regular income. This is because it helps a lender to work out if you can afford to make loan repayments.

What happens if you don't pay back an Unsecured Loan?

If you don’t pay back an unsecured loan, your lender will report this to the credit agencies. This will damage your credit score and make it difficult to get approved for loans in the future. The lender may also take legal action against you, which could result in wage garnishment or seizure of assets through the work of a debt collection agency.

It’s important to remember that taking out an unsecured loan is a big responsibility. Be sure only to borrow what you can afford to repay and make your payments on time to avoid damaging your credit score. With a little bit of planning, an unsecured loan can be a great way to finance a large purchase or consolidate debt.

An advisor putting together a puzzle.

Can you go to jail for not paying unsecured debt?

In the UK, you can’t go to jail for failing to repay a debt. However, if you don’t repay your unsecured loan, the lender may take legal action against you. This could result in wage garnishment, which is when the loan company takes money directly from your pay cheque, like council tax and national insurance.

If you’re struggling to repay your unsecured loan in the UK, debt consolidation could be a way forward. This is where you take out a new loan to repay your existing debts. This can be a good option if you’re struggling to make your monthly payments, as it could help reduce the interest you’re paying and limit the number of creditors you need to communicate with.

Consolidate Your Debts
An advisor pointing to a screen displaying Rep APR.

APRs from 5.8% to 89.9%

We are a broker, not a lender.

Unsecured Loan Representative 69.9% APR

Borrowing £7,500 over 36 months, repaying £502 per month, total repayable £18,083. Total cost of credit £10,583. Interest rate 69.9% (variable). The lenders on our panel offer loans for 12-60 months, with rates from 5.8% APR to 89.9% APR. The Representative Example is based on all loans paid out by lenders between 19th Apr 2022 and 23rd Dec 2022.

Secured Representative 11.7% APR

If you choose to add fees to the loan: Assumed borrowing of £25,000 over 120 months, plus a broker fee of £2,500 and a lender fee of £250 would result in monthly repayments of £345.55, the borrowing rate is 8.6% (variable), the APRC is 11.7% (variable), total charge for credit £16,466.00 and the total amount payable £41,466.00. You can opt to pay the lender and/or broker fees upfront, your adviser will discuss these options with you.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. All rates vary subject to loan amount, loan type and status. Repaying your debt over a longer period of time may increase the amount you pay.

Further reading

What are the Different Kinds of Unsecured Loans?

Understand what an unsecured loan is, and how best to use the different kinds of unsecured loans in 2023.

What are the Different Types of Secured Loans?

With so many different types of loans available, it can be difficult to know which is right for you. For more information on secured loans, read this expert article.

Persistent Debt – What Does it Mean for Your Credit?

Persistent debt can affect your credit rating for a significant time period. Read to find out more.