What is the difference between secured and unsecured loans?

At a glance

• A secured loan is a form of borrowing where an asset is used as collateral, which puts it at risk should the borrower default.
• Conversely, an unsecured loan is a form of borrowing without an asset tied to it, and so the borrower’s valuables are not at risk.
• Secured loans are typically for larger amounts and longer terms, whereas unsecured loans can be for smaller borrowing of up to seven years.

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.

What is a secured loan?

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.

What are secured loans used for?

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.

Types of secured loans

Secured loans include, but are not limited to:

• A mortgage
• Second charge lending (where the equity in your home is used as collateral)
• Equity release
• A bridging loan

What is an unsecured loan?

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.

What are unsecured loans used for?

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.

Types of unsecured loans

Unsecured loans include, but are not limited to:

• The majority of personal loans (As long as it does not require any form of collateral)
• Unsecured business loans

See our guide on the differences between unsecured personal loans and business loans.

Secured vs. unsecured loans

Should I get a secured or unsecured personal loan?

An unsecured loan may be worth considering if:

• You only need to borrow a small amount
• You don’t want to risk your personal assets
• You have a high enough income and credit score to qualify
• You want a short-term loan that will be fully repaid in a few years’ time
• You have other debts to consolidate

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.

Check your eligibility for a personal loan

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:

• You have an asset you can put up as collateral
• You want to borrow a larger amount
• You want a longer term to reduce monthly repayments
• You’re self-employed or don’t have a suitable income to qualify for an unsecured loan
• You have a less-than-perfect credit history

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.

Speak to a broker

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.

Alternative forms of borrowing

If neither of these borrowing options sound right for you, here are a few alternatives you could consider:

• Credit cards can be an ideal option for those looking for a more flexible form of borrowing. Rather than borrowing a set amount outright and paying it back in pre-agreed instalments, credit cards let you borrow small amounts when you need (up to a certain limit) and make flexible monthly repayments. You’re only required to repay a minimum monthly amount, but it’s advisable to pay off as much as possible to avoid unnecessary interest charges.
• Overdrafts could be an option for those who may dip into the red from time to time and need a financial buffer. Just bear in mind that while this form of borrowing can be convenient, interest rates are often far higher.
• Remortgaging in order to release additional equity could be an option for those who already have a mortgage, but there may be other options too. Those looking to use their home as a form of financing can read our guide on the best way to release cash from their home.