What is an unsecured loan?

An illustration of money and a certificate to depict a loan

Updated:Mar 27, 2026

4 min read

An unsecured loan is a loan that is not tied to any asset. The lender does not require you to put up your home, car, or any other property as collateral. Your application is assessed on your credit history, income, and ability to repay.

How does an unsecured loan work?

When you apply for an unsecured loan, the lender checks your credit file and assesses your income and outgoings to decide whether to approve your application and at what rate. Because there is no asset tied to the loan, the lender takes on more risk. This is why interest rates on unsecured loans can be higher than on secured loans.

If your application is approved, you receive a fixed lump sum and repay it in equal monthly instalments over an agreed length of time or 'term'. Your interest rate is set at the start, so your monthly payment stays the same throughout the term.

All lenders offering personal loans in the UK must be authorised by the Financial Conduct Authority (FCA), which requires them to carry out affordability checks before approving any loan. For a broader overview of how borrowing works, see our guide to how loans work.

What types of unsecured lending are there?

The most common forms of unsecured borrowing in the UK are:

Personal loans: a fixed amount borrowed over a set term and repaid in monthly instalments. This is what most people mean when they refer to an unsecured loan.

Credit cards: revolving credit where you borrow up to a set limit and repay at least a minimum amount each month. Not tied to any asset.

Overdrafts: short-term unsecured borrowing through your current account, typically at a higher interest rate than a personal loan.

The terms 'unsecured loan' and 'unsecured personal loan' refer to the same product in most cases. Most personal loans available from UK lenders are unsecured.

How does an unsecured loan differ from a secured loan?

The key difference is whether you have to offer an asset as security.

With a secured loan, the lender takes a legal charge over an asset, usually your home. If you cannot repay, they have the right to sell that asset to recover the debt. In return, secured loans can offer lower interest rates and higher borrowing limits.

With an unsecured loan, no asset is tied to the debt. The lender cannot seize your property if you stop paying, but they can take legal action.

What credit score do I need for an unsecured personal loan?

There is no single minimum credit score. Each lender sets its own criteria and assesses applications in its own way.

In general, a stronger credit history means a better chance of approval and a lower interest rate. These are some important factors lenders consider:

Your track record of making payments on time
How much existing credit you have and how much of it you are using
Your income and employment status
Your current address history

If your credit record has gaps or problems, you may still be able to borrow, but you may be offered a higher rate or a lower borrowing limit.

Checking what a good credit score is before you apply gives you a clearer picture of where you stand. You can also check your eligibility for an unsecured loan without affecting your credit score.

What can I use an unsecured loan for?

Most lenders allow personal loans to be used for a wide range of purposes. Common uses include:

Home improvements
Consolidating existing debts into one monthly payment via a debt consolidation loan
Buying a car
Paying for a wedding
Covering an unexpected cost

Lenders may restrict certain uses, such as business purposes or gambling. Always check the terms before you apply.

FAQs

What is an example of an unsecured loan?

A personal loan from a bank or lender is the most common example. If you borrow £5,000 over three years to renovate your home, and the loan is not secured against your property, that is an unsecured loan. Credit cards and overdrafts are also types of unsecure borrowing.

Is a personal loan always unsecured?

In the UK, almost all personal loans are unsecured. Secured personal loans exist but are much less common and require you to put up collateral. If a lender is offering a personal loan without asking for any security, the loan is unsecured.

Can I get an unsecured loan with bad credit?

Yes, it is possible to get an unsecured loan with bad credit. Though it can be harder and you may be offered a higher interest rate, some lenders do see that you current credit score isn't necessarily a reflection of how responsibly you handle money today.

What is a good interest rate on an unsecured loan?

It depends on your credit score, the amount you are borrowing, and the loan term. According to the Bank of England's Money and Credit release, the average effective rate on new personal loans was 8.78% in December 2025. Borrowers with a strong credit history may be able to access rates below the market average.

Always compare loans using the APR, as it reflects the full annual cost of borrowing including any mandatory fees.

What happens if I cannot repay an unsecured loan?

If you miss repayments, the lender will typically charge a fee and report the missed payments to credit reference agencies, which will damage your credit score.

If repayments stop entirely, the lender may pass the debt to a collections agency or take legal action, which can result in a county court judgment (CCJ) with lasting financial consequences.

Because the loan is unsecured, they cannot directly seize your assets, but the impact can still be significant. If you are struggling, contact your lender as early as possible.

What is classed as an unsecured loan?

Any loan where the lender does not hold a legal charge over an asset is classed as unsecured. This includes personal loans, credit cards, overdrafts, and student loans. It is different from secured lending such as mortgages and homeowner loans, where the lender can claim your property if you default.

This blog is for informational purposes only and does not constitute financial advice. Please speak to a qualified financial adviser before making financial decisions.

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