An unsecured loan, sometimes called a personal loan, does not require you to put up any collateral such as your home. The lender assesses your creditworthiness based on your income, credit history, and affordability, and lends purely on the basis of your agreement to repay.
Because there is no asset backing the loan, interest rates are typically higher than secured loans, and borrowing amounts are usually smaller — most personal loans range from £1,000 to £25,000 with terms of 1 to 7 years. If you default, the lender cannot directly repossess your home, although they can pursue the debt through the courts, which could ultimately lead to a charging order on your property.
Unsecured loans are not regulated by the FCA in the same way as mortgages, but are covered by consumer credit regulations. They can be a suitable option for smaller borrowing amounts where you do not want to put your home at risk or do not have sufficient equity for a secured loan.
You need £15,000 for a new car. You take out an unsecured personal loan at 7.9% APR over 5 years. Monthly payments are approximately £303. No asset is tied to the loan, but missed payments will damage your credit score and the lender could pursue legal action to recover the debt.
Key Points
- No collateral or asset is required to secure the loan
- Interest rates are typically higher than secured loans
- Borrowing limits are usually lower (up to around £25,000)
- Your home is not directly at risk if you default
- Covered by consumer credit regulations rather than mortgage regulation