How Do Unsecured Personal Loans Work?

You might be thinking about getting a personal loan to pay for something you want or need. Whether it’s a new car, a much-needed home renovation, a big family holiday or to consolidate existing debts, it’s important to make an informed decision about the type of personal loan you want to pursue. An unsecured personal loan can be more attractive than a secured personal loan for many reasons, but you should still be mindful of the risks involved. This article will explain how unsecured personal loans work, including the pros and cons to consider when making your decision on whether it’s right for you. You can read more about the differences between a secured personal loan and unsecured personal loan here.

How it works

The process may differ depending on your lender, so be sure to double check.

Generally, unsecured personal loans are structured to make it easy for you to understand. It will outline the value of your repayments and the relevant dates involved, which will depend on a number of factors. For example, how much money you borrow, the interest rate (fixed or variable), the length of the loan term, and how often you choose to make repayments.

Most of the big banks will require you to apply for approval which can be done online. They often also offer a quick turnaround. However, there may be eligibility requirements in place. For instance, you might be required to be 18 years old or above, and earning a certain amount of income per year.


There are many pros in choosing an unsecured personal loan, including:

  • There is no requirement for you to offer up security for the loan, such as your house or something else that you own (an asset). This means that you won’t need to worry about losing any secured assets if you don’t pay back the loan in time.
  • It offers more flexibility as generally, there are less restrictions on how you can use the money from the loan compared to a secured personal loan. For example, some lenders might only offer secured personal loans for certain purchases such as a car. The car would then act as security for the loan.
  • The application process is often quicker and less complicated than that of a secured personal loan. For a secured personal loan, you will need to provide more information about the assets you are offering as security. For instance, if it is a car, you may need to provide registration details and proof of purchase. There may also be requirements for the car to be a specific age (ie less than five years old) so that the lender can be confident in its value.
  • The interest rate may also be lower than your credit card. It might be a good option for you to simplify your debts into one unsecured personal loan.


However, there are also quite a few cons to consider when it comes to unsecured personal loans. Namely:

  • The interest rate for an unsecured personal loan is generally higher than the interest rate for a secured personal loan. This is because lenders need to justify the risk they are taking in providing an unsecured loan.
    • Lenders might offer you a lower interest rate if you have a loan guarantor who can guarantee the loan on your behalf. However, this means that they will have to pay back the loan (and interest) if you fail to make your loan repayments.
  • There is generally a smaller loan amount on offer than a secured personal loan. Again, this is because of the risk to lenders.
  • The lender might still be able to sue you for the money that you haven’t paid for.


Ultimately, you should be cautious in your decision to pursue an unsecured personal loan. If you decide that it’s right for you, make sure to keep up with your finances as repayments fall due to avoid paying late fees. The best way to do this is to prepare a budget. You should also check if any other fees are involved, such as an early repayment fee if you pay off the loan earlier than agreed upon.

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