At a glance
Whether it be a loan for a new car or second charge borrowing for much-needed home improvements, those looking for some form of financing will likely come across secured and unsecured loans.
Below we have explained the difference between these types of borrowing, and which form will be best suited for you.
A secured loan is a form of borrowing where an asset, usually the borrower’s home, but could also be a car or jewellery, is used as a form of collateral in case of missed payments. This means there is typically less risk for the lender as they’ll be able to recoup their money – normally through repossession of the asset – if the borrower cannot repay their debt.
This is why secured loans typically have lower rates than their unsecured counterparts, though as a borrower it’s important to remember that you’re taking on more risk as a result. If you’re unable to keep up with the repayments your home (or whichever asset you’ve secured against the loan) could be sold or repossessed, which would negatively impact your credit score as well.
Secured loans are often used in situations where the borrower requires a large sum of money, such as for significant home improvements or remodelling (or an entire house in the case of a mortgage). If you can put up an asset as security, lenders may feel more comfortable providing you with larger loan amounts.
Yet these loans can also be suitable for those with an impaired credit score. Given that secured loans pose less risk to the lender, they may be more inclined to offer borrowers money knowing they have collateral in place, which makes a high credit score less of a requirement. It can be beneficial for the borrower as well, because if they keep up with their repayments, they can increase their credit score in the process.
Secured loans include, but are not limited to:
Although secured loan rates tend to be lower, remember that the rate you’ll pay will ultimately be determined by a variety of unique factors, including the amount of financing, the term of the loan and your credit rating.
An unsecured loan is a form of borrowing where no asset is required as collateral, which means the borrower’s valuables are not at risk. Yet this also means that unsecured loans typically come with higher rates, as the lender is essentially taking on more risk by lending to you.
However, even without collateral in place, defaulting on your payments still comes with consequences. This can include late payment charges and a hit to your credit score, which could restrict your access to lending in the future.
Unsecured loans are typically used for smaller purchases, such as a car or wedding, and can often be thought of as an alternative to a credit card.
However, while credit cards have a borrowing limit that you’re free to use as you wish, unsecured loans offer a set amount that’s paid back through a pre-agreed monthly instalment plan, which can be helpful for budgeting and ensuring that the debt will be fully repaid by the end of the term.
Unsecured loans are also ideal for those who don’t have any collateral to apply for a secured loan, such as renters, or those who are looking to consolidate other debts.
Unsecured loans include, but are not limited to:
See our guide on the differences between unsecured personal loans and business loans.
Secured loan | Unsecured loan | |
How much can you borrow? |
Typically between £10,000 and £500,000+ |
Typically between £1,000 and £25,000 |
Typical loan terms |
Can be as long as 40 years |
Between one and seven years |
Interest rates |
Typically lower, can be variable |
Often higher, usually fixed |
Any fees? |
Can be arrangement fees, valuation fees and legal fees |
Fees for missed payments |
Speed of application |
Can take several weeks due to the additional checks required |
Usually quick to arrange – can be completed in as little as a few hours depending on the lender, but it may take longer for the money to be transferred |
Impact of credit history |
Credit history is less of a factor |
Need a high credit score |
Key eligibility criteria |
Need a suitable asset as collateral |
Relies on income and credit score |
Risks of defaulting |
Could lose your home (or other asset secured against the loan) and face a severe hit to your credit score |
Damage to credit score and reduced borrowing options |
An unsecured loan may be worth considering if:
Essentially, unsecured personal loans are normally best-suited to those who want to borrow smaller amounts over a shorter term with fixed monthly repayments and no risk to assets, and don’t mind paying higher rates for that kind of security. Just bear in mind that you’ll need a high enough income and credit score to qualify; read our guide on how to improve your credit score if you need some pointers.
See if you qualify for a personal loan with our preferred broker, Loans Warehouse (this won’t affect your credit score).
You can also use our loan calculator to see how much your monthly payments could be based on your loan amount and chosen term.
A secured loan may be worth considering if:
Secured loans can be the right option for you if you need to borrow a significant sum of money, but they can also be used for smaller amounts if you don’t have the income or credit score to qualify for an unsecured loan.
Just bear in mind that these loans are typically repaid over a longer period, so although the interest rate tends to be lower, you’ll often pay far more in interest overall. Find out more about secured loans to see if they’re right for you.
Taking on a secured loan won’t be right for everyone, but our preferred broker Loans Warehouse can help you decide if they’re worth considering and, if so, can help you find the perfect secured loan for your needs.
If neither of these borrowing options sound right for you, here are a few alternatives you could consider:
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.