Unsecured loans vs secured loans

With so many different types of loan on the market, many of us will wonder whether secured or unsecured loans are better. However, it's actually all about making sure you find the right type of loan for your needs.

Caroline Ramsey 13 November 2020

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There’s no easy answer to the question ‘are secured loans or unsecured loans better?’ You need to consider your individual requirements and unique circumstances when deciding which type of loan will work best for you.

Unsecured Loans

Unsecured loans are basic, personal loans that are not secured against equity or property. Lenders offer this type of loan to individuals who they consider to be able to make regular payments in accordance with a pre-agreed repayment plan over a specific period of time.

Unsecured loans often come with less favourable interest rates than secured loans as this type of loan carries a greater level of risk for lenders.

Unsecured loans often come with less favourable interest rates than secured loans as this type of loan carries a greater level of risk for lenders. This is not to say that some great deals aren’t available. It’s worth taking the time to research the market thoroughly before deciding on a particular loan or provider.

Unsecured personal loans are often used to pay for large-ticket items such as cars, appliances, home improvements, holidays or major life events, such as weddings.

Features of an unsecured loan
  • They have a predetermined loan term, usually up to 5 years
  • Regular monthly repayments must be made
  • Loan amounts are usually limited to less than £25,000
  • They are available from a variety of different providers
  • Interest rate remains the same for the duration of the loan.

What are the requirements for taking out an unsecured loan?

Lenders will look closely at your credit history when deciding whether to offer you an unsecured loan. Your credit rating may have a bearing on the interest rate you are offered, the loan amount available to you and even the time period over which you must repay the loan.

There are now ways to check your credit rating before you apply for unsecured loans, which is a wise move. If you continue to apply for credit and are refused, this can cause more damage to your credit profile.

Where can I get an unsecured loan?
  • High street banks
  • Challenger banks
  • Peer-to-peer lenders
  • Retail finance providers

Secured loans

Secured loans are very different from unsecured loans in that they usually involve higher loan amounts and are secured against an asset - usually a property that you own. As a result of them being secured, they are less of a risk to the lender and interest rates can be more favourable for the borrower. However, they are much riskier for the borrower, as your home is at risk if you cannot keep up repayments.

Secured loans can offer borrowers access to larger amounts of money than unsecured loans but they can also carry arrangement fees and/or early repayment fees. Ensure you are clear on all the terms of the deal before you sign up for a credit agreement with a secured loan provider.

As a result of the loans being secured against your property you can expect a much more detailed application process, very similar as applying for a mortgage when you buy a house.

There are a few differences in secured loan types:

Home owner secured loans or second charge loans/mortgages

A second charge mortgage is where you have an existing mortgage on your property and you take out a separate second agreement with your existing or different lender. This type of secured loan is only likely to be offered if you have a good amount of equity in your property.

The existing mortgage provider holds the first charge on your property. The Secured loan provider holds the second charge on your property.

First charge mortgages

This type of loan involves a homeowner borrowing against the value of their home on which they do not have an existing mortgage.

Unsecured vs secured - quick comparison

Unsecured loans advantages Unsecured loans disadvantages
  • Lower-risk to borrower – higher to lender
  • Simple application process
  • Low or no set up costs
  • Wide range of providers
  • Set repayment plan
  • Limited loan amounts
  • Higher interest rates
  • Less flexibility
Secured loans advantages Secured loans disadvantages
  • Higher loan amounts
  • Lower interest rates
  • Options available to those with lower credit ratings
  • Sometimes a good option for debt consolidation
  • Higher risk to borrower using home as security
  • Need to be a homeowner to be able to get one
  • Sometimes expensive to arrange
  • Variable interest rates may apply during the term of the loan

Whether you are applying for a secured loan or an unsecured loan, it’s important that you take your specific borrowing requirements and your financial situation carefully into consideration. Think about how long you’ll need to repay the money and how much exactly you need to borrow. It’s important not to borrow more than you can afford to repay and to understand the cost of the loan over the whole term.

Take steps to prepare your information before making a loan application and ensure that you have checked your personal credit record in advance. Making unsuccessful loan applications can have a damaging impact on your credit score, making it even more difficult to secure a loan in the future.

Once you have given your requirements some serious thought and carefully considered your individual circumstances, it is likely to become clear whether an unsecured or secured loan is the right option for you.

About the author:

Well-established content creator who specialises in the personal finance industry. More than a decade of working in editorial teams, she offers highly tailored content covering a number of topics. Read more

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