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How Do Unsecured Loans Work?
An unsecured loan is a personal loan that does not require a property to be used as security on the loan. Unsecured loans are therefore available to people who do not own their home.
An unsecured loan will be leant based upon your credit score and financial circumstances only, so you will need to have a good credit history.
If you are borrowing larger sums of money with an unsecured loan, it will help if you are a homeowner as having a mortgage can significantly improve your credit score. However, this will only be the case if you have never had arrears or defaults on your mortgage.
What can an unsecured loan be used for?
An unsecured loan can be any for pretty much any purpose, although it does have to be for your own use and the purpose must be legal.
The most common reasons for taking out an unsecured loan are home improvements, consolidating debts, buying a new car or vehicle and even getting away on a luxury holiday abroad.
Some unsecured loan lenders may have certain stipulations depending upon what you intend to use the loan for. Home improvement loans for example may only be offered to homeowners.
If you are looking to consolidate your debts, you will still need to have a good credit history to take out an unsecured loan.
There are many options available if you are looking to take out an unsecured loan to purchase a car. Some unsecured loan lenders offer loans tailored specifically for purchasing vehicles, and if you have a poor credit history a specific car loan lender can often help people with a bad credit rating.
How much can you borrow with an unsecured loan?
The amount of money you can borrow with an unsecured loan will vary between different lenders, though you can usually find loans from £1,000 all the way up to £25,000.
Larger loans will obviously require a very good credit history, as the lender has no security if you fail to make your loan repayments - this is where being a homeowner can help, because even though they won't secure the loan on your property, mortgages go a long way to improving your credit history.
When determining how much money you can borrow with an unsecured loan, the amount you can afford to repay will play a major part.
Because unsecured loans have shorter maximum repayment terms than their secured counterparts, borrowing larger sums of money can mean hefty monthly repayments, so it's really important you know how much you can comfortably afford to repay each month.
To find out how much your monthly loan repayments are likely to be on an unsecured loan you can use our loan calculator.
You will have to enter the amount of money you are looking to borrow, how long you would like to repay it over and an interest rate for the loan. You can find out the different loan terms on offer and the typical APR of each loan lender from our unsecured loan comparison page.
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Compare unsecured loans
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