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Unsecured loans - what are they and how do they work?

What is an unsecured loan?

When you get an unsecured loan, you borrow money from a bank or a lender and agree to make regular payments until you’ve paid the loan back in full.

An unsecured loan (also known as a personal loan) is a loan that you can take out without putting up one of your assets (things you own like your home or car) as a way to qualify for the loan. These are called secured loans. If you don't make the payments with a secured loan (usually these are monthly), you could end up paying more in fees and additional charges. This could end up damaging your credit history.


If you’re looking to take out a loan, find out more about Monzo and loans here. All you need to do is answer three quick questions to see if you can get a loan with us. Then we’ll show you what you could borrow and how much it’ll cost you, all without affecting your credit score.

If you’re eligible, our representative APR is 10.5% for loans more than £10,000, up to £25,000. For loans up to £10,000 it’s 19.9%.


Types of unsecured loans

There are lots of different types of unsecured loans, but some of the most common include:

  • Personal loans

  • Overdraft loans

  • Credit card loans

  • Payday loans

  • Utility bill debt

  • 'Buy now, pay later' loans (also known as catalogue debt)

How do you qualify for an unsecured loan?

The lender will approve unsecured loans after they've looked at and considered:

  • Your 'creditworthiness' or credit history

  • Your personal circumstances

  • Your income

  • Your ability to pay

‘Creditworthiness' is how suitable the lender thinks you are to get a loan. It can be based on your credit score and credit history. If you're looking for an unsecured loan, you usually need a good credit score.

If you have a less than perfect credit score, here's how you can try get a loan with bad credit history.

Applying for an unsecured loan

Here's how an unsecured loan works:

1. You make your loan application

2. The bank or lender will approve your unsecured loan after they've looked into your credit history and ability to pay, or rejected

3. If your loan application is successful and the lender approves your unsecured loan, you’ll make regular monthly payments over a set period of time until you’ve paid the loan in full.

If you don't make these payments, the lender can add on an additional charge which could damage your credit rating.

The lender can even take you to court to try and get their money back. But they should be clear about how they handle these circumstances upfront!

Unsecured loans can also have higher interest rates than secured loans because the loan isn't secured on your home. Find out more about how loans work here.

What’s the difference between secured and unsecured loans?

If you've been looking into personal loans, you might've come across something called a secured loan too. A secured loan gets ‘secured’ against one of your assets, like your home or your car. Lenders offer secured loans so they can give people bigger loans or lend to people with less-than-perfect credit scores.

To secure a loan, they'll ask you to promise something you own as a guarantee, in case you can't pay your loan back.

Who should consider an unsecured personal loan?

An unsecured personal loan can be a good option if you’re looking for a loan that won't have a risk on their property or any other assets they own.

They're also helpful if you're looking for a more flexible type of loan that a credit card alone couldn't give you. It's often also quicker to apply for an unsecured loan than a secured loan too.

You usually need a good credit score for the best rates, and unsecured loans are often more expensive. This is because the lender charges higher interest rates because there's nothing for them to secure your loan against.

Also, lenders usually give unsecured loans in smaller amounts of between £1,000 and £25,000, whereas a secured loan can be issued for up to £100,000. With unsecured loans, lenders will set out a fixed payment and often you'll be able to decide what time period you want to pay your loan back over.

What are the risks of an unsecured loan?

Taking on borrowing you can't afford is a risk that comes with both secured and unsecured loans.

Damaging your credit score is also something that you need to consider, as well as late fees for missed payments. Secured loans put things you own in danger of being taken away by your bank. An unsecured loan doesn't.

Being taken to court if you can't pay is another risk of both types of loans that you should keep in mind. When you're taking a loan out, it's also important to make sure you're using a lender regulated by the Financial Conduct Authority so you're fully protected.

How to get the best deal on an unsecured loan

Applying for an unsecured loan is all about looking into the best and cheapest loans option you can get.

It's important to understand what APR (Annual Percentage Rate) the lender has offered you. APR reflects the interest rate and any additional charges as a percentage of the amount you want to borrow.

The APR the lender gives you is based on how the lender looks at your credit rating. Each lender has different criteria on how they see your credit score. This impacts whether the lender offers you a loan and also the APR you're offered with it. Importantly, APR only includes mandatory charges.

It may not cover optional fees and it doesn’t include fines (like for going over your credit limit). Keep in mind this means your loan offer can be more expensive than the representative APR (which is what the lender advertises).

What can I use an unsecured loan for?

You could use an unsecured loan when you need a lump sum for a large purchase like home improvements.

The cost of the loan is fixed, so your monthly repayments stay the same for the whole time you're paying back your loan. You can also use an unsecured loan for home improvements or a car loan.