Unsecured loans

An unsecured loan is a lump sum borrowed from a bank or lender. You pay it back in monthly instalments, plus interest and fees.

Unlike a secured loan, no collateral is needed, so you won’t lose your home if you fall behind on payments.

Usually, yes. Compared to secured loans, they have higher interest rates but the total cost will depend on how much you borrow and for how long. 

Example

If you borrow £10,000 over three years at a 5% interest rate, you’ll repay £10,771.58 in total.

But if you borrow £10,000 at a 3% interest rate for seven years, you’ll pay back £11,083.86 – more than the loan with a higher interest rate.

Missing repayments can lead to fees and a bad mark on your credit report. If you’re struggling to afford your repayments, talk to your lender. They have a responsibility to try and help customers in financial difficulty. 

Ignoring the problem and missing payments can lead to serious consequences, including legal action.

There are lenders who specialise in bad credit loans, but they charge much higher interest.

Having a guarantor may increase your chances of getting approved for an unsecured loan if you have bad credit.

Before taking out an unsecured loan, it’s good to know the pros and cons.

Pros of unsecured loans

• no risk to your home
• quick access to money
• fixed repayments can make it easier to budget
• the repayments are designed to clear your debt in full within a specific timeframe, unlike with credit cards
• you can use an eligibility checker to see if you’re likely to be approved without hurting your credit score
• your valuables are safe unless a county court judgment is made against you for non-payment

Cons of unsecured loans

• you’ll always pay interest, unlike with credit cards with introductory 0% periods
• they generally come with higher interest rates than secured loans
• the interest rate often goes down the more you borrow so you may be tempted to accept more than you need
• you’ll generally need to borrow at least £1,000 so you might end up taking more than you need, whereas credit unions tend to offer smaller amounts
• less flexibility than credit cards when it comes to repayments

Other options include:

• A credit union loan: you can usually borrow smaller amounts from a credit union and they may consider an application if you’ve been turned down by a bank or building society.
• Family or friends: you might be able to get an interest-free loan from a loved one.

Credit card: if you can get a credit card with a 0% introductory period, you might be able to borrow the money you need without paying any interest.