A guide on secured and unsecured loans

Taking out a loan is a major financial decision, so understanding your options is key. One of the first things to consider is whether a secured or unsecured loan is right for you.

Here we will break down the differences between secured and unsecured loans and explain how each one works. We'll also explore their benefits and risks.

In this article, we will look at:

• what secured and unsecured loans are
• the benefits and risks of each type
• key differences between secured and unsecured loans

What is an unsecured loan?

An unsecured loan is a type of loan that is not secured against your property. This means the lender cannot take your home if you fail to repay your loan.

Lenders decide if you qualify for an unsecured loan by looking at factors such as your credit score, credit history, debt repayment record, employment, income, and expenditure.

With this type of loan, you can borrow a set amount of money and pay it back in monthly payments, usually over a period of 1 to 7 years.

Why do people get unsecured loans?

• to pay for a car
• to pay for a wedding
• to pay for a holiday

What is a secured loan?

A secured loan is a type of loan that is backed by something you own, usually your home. Your home is used as security for the lender. Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured on it.

A common type of secured loan is a homeowner loan. This uses your home as security and your equity to determine how much you could borrow. To qualify, you must own a home with a mortgage.

Why do people get secured loans?

• to consolidate existing debts
• to make home improvements
• to cover one-off major expenses

What are the benefits of secured loans?

Lower rates of interest

Since the loan uses your home as security, lenders may charge less interest.

Borrow more money

Depending on the value of your home and the available equity, you could borrow up to £500,000 or more, subject to an affordability assessment.

Possible to qualify with poor credit

You might still qualify with poor credit but expect higher interest rates, fewer lender options, and less favourable terms.

Longer time to repay

With secured loans, you're able to borrow a large amount of money and pay it back over a longer term.

What are the risks of secured loans?

Loss of your home

Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured on it.

Credit score damage

Missing payments can damage your credit rating, making it harder or more expensive to borrow in the future.

Over-borrowing

You may be tempted to borrow more than you can afford, increasing the risk of financial difficulty.

Extra fees and charges

Secured loans may include additional costs such as legal, valuation, or administration fees. Factor these into your decision.

Key information for secured loan applicants: If you have a joint mortgage, both parties will need to agree and apply together for a secured loan.

What are the benefits of unsecured loans?

No security required

You don’t have to use your home as security. Your home isn’t at risk if you miss repayments.

Faster approval

Lenders can assess your eligibility without needing to value your home, which can speed up the process. Most customers have the funds in their account within a few days.

Fixed interest rates

Monthly repayments remain the same, making it easier to budget.

Flexible use of funds

Unsecured loans can be used for a variety of purposes, such as consolidating debt or funding home improvements. However, lenders may have restrictions on how the funds can be used, so it’s important to check the terms before applying.

What are the risks of unsecured loans?

Higher interest rates

Because the loan isn't secured against your home, lenders take on more risk and typically charge higher interest rates. This can make the loan more expensive over time, especially for longer terms.

Harder to get with bad credit

Approval is largely based on your credit rating and financial history. If your credit is poor, you may be declined or offered less favourable terms, such as higher rates or lower loan amounts.

Lower loan amounts

Unsecured loans usually come with smaller limits, often between £1,000 and £25,000, since the lender doesn’t have your home to fall back on if you default.

Shorter time to repay

These loans are often repaid over 1 to 7 years. While this means you’ll be debt-free sooner, it can also result in higher monthly payments, which may strain your budget.

How are secured and unsecured loans different?

1. Home as security

• Secured loan: requires your home as security
• Unsecured loan: does not require your home as security

2. Interest rates

• Secured loan: usually lower interest rates
• Unsecured loan: usually higher interest rates

3. Loan amount

• Secured loan: higher loan amounts, usually up to £500,000, but some lenders may offer more
• Unsecured loan: lower loan amounts, usually between £1,000 and £25,000

4. Time to repay

• Secured loan: Usually longer repayment terms
• Unsecured loan: Usually shorter repayment terms

5. Approval process

• Secured loan: Subject to lender's affordability assessment, which includes property value, equity in the property, income, outgoings and credit history
• Unsecured loan: Based mainly on your credit score, repayment history, income, and outgoings. Approval is usually quick, often fully online, with funds sometimes paid the same day

6. Risk to customer

• Secured loan: If you fail to repay your loan, you could lose your home and damage your credit score
• Unsecured loan: If you fail to repay your loan, you won't lose your home, but you could damage your credit score

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