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Last updated
March 21st, 2024

What is an unsecured loan?

An unsecured, or 'personal', loan is a type of loan that isn’t secured against an asset such as a vehicle or home. While this makes unsecured loans less of a risk to you, it also typically means lower limits on how much you can borrow and higher interest rates.

Lenders look at your application and decide whether you’re eligible and what interest rate they'll charge. If approved, the money is transferred to your bank account. You then pay back the loan in fixed monthly instalments until the debt is cleared.

Your credit history plays two key roles in getting a personal loan. First, the credit check plays a big part in whether your application is approved by the lender. And second, your credit history influences the unsecured loan rates you’re offered and whether you’re able to access the cheapest rates.

Should I get an unsecured loan?

Borrowing of any kind should only be carried out after carefully considering your finances. Think about why you need the money, how much you need to borrow and, most importantly, do you have a plan in place to pay it back.

Unsecured loans are most often used for borrowing more than £1,000 and many providers have minimum loan amounts, which may be even higherThat means if you're looking to make a major purchase such as new furniture for your home, do a home improvement project, or take a holiday you've always wanted, a personal loan might be a good way to finance it.

But before deciding on a personal loan, you should explore the option of using a 0% purchase credit card, as you can get 0% interest offers for up to 21 months. But it's possible you may not get a credit limit large enough to cover the amount you're looking to borrow. That's when a personal loan becomes to make more sense. Personal loans don't put any assets at risk, so it might be a better fit than a secured loan, but it will depend on how much you want to borrow, the rates on offer, and the affordability of repayments.

Will I be accepted for an unsecured loan?

Lenders evaluate several key criteria to determine your eligibility for an unsecured loan:

  • Age: You must be at least 18 years old to apply for an unsecured loan.

  • Residential status: Some lenders may require you to be a UK resident and have a fixed address.

  • Income and employment: Lenders want assurance that you have a stable income and employment. They will assess your ability to repay the loan.

  • Credit score: Your credit score is a significant factor. A higher credit score indicates a history of responsible borrowing and may result in better loan offers. Lenders often have minimum credit score requirements.

  • Existing debt: Lenders consider your existing debt obligations when determining if you can take on additional debt. A high debt-to-income ratio may affect your eligibility.

It's important to note that each lender may have slightly different eligibility criteria, so it's advisable to check with the specific lender you're interested in.

How to compare unsecured loans

Comparing unsecured loans is a crucial step to ensure you get the best deal that suits your financial needs. Here's how to go about it:

Interest rates

The interest rate on an unsecured loan is a key factor that affects the overall cost of borrowing. Generally, borrowers with higher credit scores receive lower interest rates. Compare the APR (Annual Percentage Rate) to get an accurate picture of the loan's cost, as it includes both the interest rate and most fees.

Loan terms

Loan terms vary from lender to lender. Consider the length of the repayment period. Longer terms should result in lower monthly payments but may cost you more in interest over the life of the loan. Shorter terms mean higher monthly payments but less interest paid overall.

Fees and charges

Read the loan agreement carefully for any hidden fees or charges. Common fees may include arrangement fees, late payment fees, or early repayment penalties.

Repayment flexibility

Some lenders offer flexible repayment options, such as the ability to make extra payments or pay off the loan early without penalties. This flexibility can be valuable if your financial situation changes.

Reviews and reputation

Research the lender's reputation by reading reviews and checking their credentials. A reputable lender should have transparent terms and excellent customer service.

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How much do unsecured loans cost?

Understanding the cost of an unsecured loan is essential to make informed borrowing decisions. Here are the primary cost components:

Interest rates

The interest rate is the cost of borrowing the money and is usually expressed as an annual percentage rate (APR). Lenders determine your interest rate based on your creditworthiness and other factors. Borrowers with higher credit scores typically receive lower interest rates.


Lenders may charge various fees, including:

  • Arrangement fees: These are fees for processing your loan application and are usually a percentage of the loan amount.

  • Late payment fees: If you miss a payment deadline, you may incur a late fee.

  • Early repayment fees: Some loans have penalties for paying off the loan before the agreed-upon term.

  • Other Charges: Check for any additional charges mentioned in the loan agreement.

Total loan cost

To calculate the total cost of your loan, consider both the interest you'll pay over the loan term and any associated fees. The APR puts these together making it easier to compare different products. You can use our loan repayment calculator to get an idea of how much your loan will cost each month.

Taking out loans is an inevitable part of life for many individuals. When considering unsecured borrowing, make sure to shop around and consider all available loan choices and make certain that the borrowed amount aligns with your ability to repay.

What is the application process for unsecured loans?

Applying for an unsecured loan involves several steps. Here's an overview of the typical process:

  • Preparation: Gather the necessary documents, including proof of identity, income, and address. Review your credit report to ensure its accuracy.

  • Research lenders: Research and compare lenders to find the one that offers the best terms for your needs.

  • Application: Complete the lender's application form, which may be done online or in person at a branch. Be honest and accurate in providing your information.

  • Credit check: The lender will conduct a credit check to assess your creditworthiness. This involves reviewing your credit history and credit score.

  • Loan offer: If approved, the lender will present you with a loan offer outlining the terms and conditions, including the interest rate, loan amount, and repayment schedule.

  • Acceptance: Review the loan offer carefully. If you agree with the terms, you can accept the offer.

  • Funding: Once you accept the offer, the lender will pay the funds to your bank account. This process can vary in speed, depending on the lender.

  • Repayments: Begin making regular monthly payments as outlined in the loan agreement.

Alternatives to unsecured loans

If an unsecured loan doesn't meet your needs, you could consider other forms of credit.

Secured loans

Often known as homeowner loans, these loans require you to put up collateral - such as a property - against your loans, so if you're unable to repay the loan, the lender can repossess the property to recoup the loans. This is why secured loans carry more risk for you, but on the other hand you can borrow more money than you could with an unsecured loan, and you're more likely to get a better interest rate.

Credit cards

Credit cards can be a cost-effective way to borrow money, depending on the rate you’re offered. 0% cards allow you to spread the cost of purchases interest-free, which makes them a great option, as long as you make repayments within the offer period. How much you can borrow this way will depend on your bank and your credit history. If you can’t get a 0% deal, make sure you compare the interest rate against any personal loans to find the most cost-effective way of borrowing.


An overdraft is a financial arrangement provided by a bank that allows you to withdraw or spend more money than is available in your current account. Essentially, it permits the account holder to have a negative balance up to a certain predetermined limit, which is agreed upon with the bank.

Overdrafts can be helpful for managing short-term financial gaps or unexpected expenses, but they come with hefty fees and interest charges, so they are not a sensible long term credit solution.


How can I get a personal loan?

Use this comparison to find the cheapest loan that offers the amount you want to borrow. You can then apply online, by phone or by post.

How much can I borrow with a personal loan?

Most personal loans let you borrow up to £25,000. However, how much you can borrow will depend on your income and your credit history. Some lenders will offer significantly more than that, for instance up to £50,000 is relatively common.

What does APR mean?

APR (Annual Percentage Rate) is the amount of interest you would pay across your loan’s total value over a year. This typically includes arrangement fees. Lower rates of APR mean lower monthly payments. 

What happens if I miss a payment?

You may be charged a fee and pay more interest because you will owe money for longer. It could also impact your credit rating, making it harder and more expensive for you to borrow money in the future.

How long can I borrow for?

Most personal loans let you borrow between one and five years, but you may be able to borrow for longer.

Can I cancel my loan?

Yes, you have a 14-day cooling off period to cancel your loan. But you must pay back any money borrowed during that time, within 30 days of cancelling.

Are unsecured loans hard to get?

Yes and no. While the process of getting an unsecured loan is simple, and can be completed in a few minutes, there are some people who will be rejected if they fail to meet certain requirements or fail a credit check. There are easier loans to get approved for, however they tend to cost more.

Does an unsecured loan hurt your credit score?

Personal loans have three direct effects on your credit report. First, any formal application is recorded on your credit file. That means other lenders can see it, and making a lot of applications in a short space of time can be frowned upon. Second, your payment history is visible to others. That's great news if you pay up on time each month, but missing or being late with payments can negatively impact your score. Finally, if you apply for other forms of credit in the future, for instance a mortgage, any existing debts will be factored in when the provider calculates what repayments you can afford.

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About the author

Salman Haqqi
Salman Haqqi spent over a decade as a journalist reporting in several countries around the world. Now as a personal finance expert, he helps people make informed financial decisions.

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