Secured vs unsecured loans: everything you need to know
Home >
This article is for general information and guidance only. It is not financial advice and should not be relied on as a personal recommendation. If you are unsure whether a financial product is right for you, you should seek independent financial advice.
If you’re thinking about borrowing money, you may have come across two main types of loans: secured loans and unsecured loans.
Both let you borrow money and repay it over an agreed term. But they work in different ways and come with different risks. Understanding the difference may help you make a more informed decision.
In this guide, we’ll cover:
- What secured and unsecured loans are
- Things to consider before taking out a secured or unsecured loan
- The key differences between secured and unsecured loans
- Which type of loan may suit different circumstances
- Alternatives to taking out a loan
What is a secured loan?
A secured loan is borrowing that’s secured against an asset you own. This is often your home, although other assets may also be used as security.
The security reduces the lender’s risk. Because of this, secured loans could allow you to borrow more than an unsecured loan and repay the balance over a longer term.
People may consider a secured loan when they need to borrow a larger amount of money. This might be for home improvements, debt consolidation or another significant expense.
The amount you could borrow, the interest rate you’re offered and the repayment term will depend on your individual circumstances and the lender’s lending criteria.
As your home or another asset is used as security, it’s important to consider whether you’ll be able to maintain the repayments for the full term of the loan.
Things to think about before taking out a secured loan
Potential advantages
- You may be able to borrow a larger amount.
- Repayment terms may be longer, which could make repaying the loan more manageable.
- Interest rates might be lower than some forms of unsecured borrowing.
- Some lenders may consider applications from people with a wide range of credit histories.
Potential drawbacks
- If you don’t keep up with repayments, your property may be repossessed.
- Borrowing over a longer term could mean paying more interest overall.
What is an unsecured loan?
An unsecured loan allows you to borrow money without using your home or another asset as security.
As there is no security, the amount you could borrow and the interest rate you receive may differ from a secured loan.
People may consider an unsecured loan for smaller borrowing needs or one off expenses. The amount available and the terms offered will vary depending on the lender’s criteria and your individual circumstances.
Things to think about before taking out an unsecured loan
Potential advantages
- Your home or other assets are not used as security, so there is no risk to your personal assets.
- Some unsecured loans offer a fixed interest rate. This means your payments will be the same every month, which could make it easier to budget.
Potential drawbacks
- The amount you could borrow may be lower than with a secured loan.
- Interest rates may be higher compared to a secured loan.
- Shorter repayment terms could mean higher monthly repayments.
Key differences between secured and unsecured loans, at a glance
Which type of loan could suit my circumstances?
There isn’t one type of loan that’s suitable for everyone.
The type of borrowing you consider may depend on:
- The purpose of the loan
- How much you want to borrow
- Whether you’re comfortable using your home or another asset as security
- The monthly repayment you could comfortably afford
- The total cost of borrowing over the full term
- Your individual circumstances and the lender’s criteria
It’s important to take time to compare the key features, costs, risks and different types of borrowing to ensure you’re able to make an informed decision.
What alternatives are there to taking out a loan?
Taking out a loan may not always be the most suitable solution for your financial goals. Depending on your circumstances, there are other approaches you may want to consider.
Using savings
If you have savings available, you could consider using some of them instead of borrowing. This means you won’t have to pay interest or make monthly loan repayments.
However, you should think carefully about whether using your savings would leave you with enough money to cover essential expenses or unexpected costs in the future.
Using a 0% money transfer credit card
A 0% money transfer credit card allows you to transfer money from the card into your bank account. You’ll usually pay a one-off transfer fee, but you won’t pay interest on the transferred amount for a set period.
This could be an option for some people, but it is still a form of borrowing. You’ll need to make at least the minimum monthly repayments and clear the balance before the 0% period ends if you want to avoid paying interest. Interest could be high once the introductory period has ended. Additionally, failure to keep up with credit card payments could negatively impact your credit score.
Remortgaging
If you own your home, you could consider whether remortgaging is an option. This involves changing your existing mortgage, either by switching to a new deal with your current lender or moving to a different lender.
Remortgaging may allow you to borrow additional money in some circumstances, but it will increase the amount you owe against your home and the overall cost of your mortgage. There may also be fees involved.
If you’re considering this option, it’s important to understand how changing your mortgage could affect your monthly payments and the total amount you repay. As with any mortgage secured against your home, your home may be repossessed if you do not keep up repayments.
Waiting and saving
If the expense isn’t urgent, you could consider delaying it and saving towards the cost instead. This could help you avoid taking on new borrowing and paying interest.
For essential expenses, it may also be worth checking whether you’re entitled to benefits or other financial support before deciding to borrow.
If you’re already struggling to pay bills or manage existing debts, taking on more borrowing may not solve the underlying problem. Free and impartial debt advice is available from organisations such as MoneyHelper, StepChange and National Debtline.
Representative 21.82% APRC (Variable)
For a typical loan of £18,900 over 180 months with a variable interest rate of 18.72% per annum, your monthly repayments would be £335.99 for 179 months and then a final payment of £335.79. This includes a Product Fee of £1890.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £60,478.00. Annual Interest Rates range between 8.6% to 27.87% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
