Find out how secured and unsecured loans differ, and why you need to choose the right one when you're looking into borrowing money
Whether you need to make urgent repairs to your home, or just want to change your car, taking out a loan could be one way to bring forward something you’d otherwise have to put off for some time.
However, before taking out a loan of any kind, you need to be sure that it suits your circumstances. Researching the different types of loan on offer is vital, especially when choosing between a secured and unsecured loan.
There are fundamental differences between a secured and unsecured loan so to help you understand which one is right for you, let’s look at the differences between them.
What are secured loans?
A secured loan is a loan that’s usually – but not necessarily – used to borrow a large amount of money.
A secured loan is a loan secured against an asset you own, usually your home – hence why it is sometimes known as a homeowner loan.
It’s important to know that this means that your home is at risk if you do not keep up with repayments.
With a secured loan, the amounts you can borrow depends on lenders but can range from £3,000 to a lot more, but do be aware that the amount you can borrow, the length of the loan and the interest rate will depend on the lender's criteria and your personal circumstances
The amount of available equity in your home (the difference between the value of the property and the amount you still owe on your mortgage) will also be taken into account, as you can release the equity tied up in your house to borrow more.
What are unsecured loans?
An unsecured loan is simple in that you borrow money from a lender, such as a bank, until it is repaid in full.
Unsecured loans (or personal loans) do not require any security, but are decided based on your credit rating and whether you can afford the loan repayments.
Because of this, interest rates tend to be higher.
Loans come with a varying Annual Percentage Rate (APR) – if you’re unsure on what APR means or want to know more, read our APR explainer.
You should also check the terms and conditions carefully so as not to fall foul of less obvious fees or penalties.
The pros and cons of a secured loan
There are a few upsides – and downsides – to taking out a secured loan that you must be aware of before making any commitments.
- The interest rate is lower, as it is secured against your home.
- You could lose your home if you fail to afford your repayments
- If your loan has a variable interest rate, the repayments could increase.
The pros and cons of an unsecured loan
Similarly, unsecured loans are not without their negatives.
- Personal loans require no security, so come with a lower risk
- Interest rates tend to be higher
- If you don’t make repayments to the lender you be liable to pay charges, and the lender could take you to court
- Failure to repay the loan on time could have an impact on your credit rating.
Can I afford a loan?
Before you take out a loan, make sure you’ve worked out your income and outgoings and are happy that you can afford all your current commitments – such as your mortgage and household bills – plus your loan repayment.
Think about the future, too. If your circumstances change, could you still afford the repayments?
How does a loan affect my credit score?
Before you apply for a loan, shop around first and compare the rates being offered by different lenders. Remember, every time you apply for a loan it leaves a footprint on your credit record and could impact your credit rating. If your credit score is poor and you’re not sure why, there are a few things you can do to improve it.
If you pay late or default on payments, then it could impact your credit score and could make it more difficult to take out a loan in the future. If you keep up with your payments and make them on time, however, then you can build a stronger, healthier credit score.