What is an Unsecured Loan?
Unsecured loans are commonly known as 'personal loans' and they are suitable for almost anyone who has a fair credit score. The loan is 'unsecured' because there is no need for a security or guarantor to be pledged in the lending agreement.
This differs from a secured loan, where the lender will take an asset (typically a home/property) as a security against the amount borrowed. This means that the lender has a claim to that asset if the the borrower cannot keep up with repayments. You can read more about secured loans here.
This might lead you to wonder why anyone would take out a secured loan over an unsecured loan. This is a fair observation, but there is much more to consider. Here's our quick breakdown of the advantages and disadvantages to help you decide which type is better for you.
Advantages of an Unsecured Loan
- You are not required to offer a security (such as a home) to the lender.
- They are popular and widely accessible for non-homeowners and homeowners alike.
- Unsecured loans are generally suitable for borrowing around £1000 to £25,000.
- They can be flexible when it comes to the borrowing period and repayment terms you'd like to choose.
- The interest rate (APR) is often fixed so you'll know exactly what you need to pay back each month.
Disadvantages of an Unsecured Loan
- You will need a reasonable credit score to qualify for an unsecured loan. Otherwise you may struggle getting accepted.
- Higher loan amounts may only be available to people with excellent credit scores.
- In most cases large loan amounts (over £25k) will only be available with a secured loan.
- Failing to keep up with repayments can damage your credit score and result in late payment fees.
Final Thoughts and Advice
In summary, choosing the right type of loan for you will depend on multiple factors. Unsecured loans are well suited for people who aren't necessarily homeowners and are looking to take out a small to medium loan sum. This could be for a home improvement, car purchase, debt consolidation or many other purposes.
Despite there being no obligation to offer a security to the lender, it's still important to only borrow what you can afford to pay back. Whilst you may not risk losing an asset (like your home) you can still risk damaging your credit score and receiving late repayment penalties.
Whichever type of loan you choose we always recommend that you shop around to find the best deal. Rates can vary greatly between different banks, building societies and other financial institutions. Our loan comparison tool can help you compare deals from over 30 lenders without affecting your credit score. Head to our application page and start your search today!