We discuss the difference between a secured and unsecured loan to help you understand which one's right for you. We'll go over the following:
It's a loan you secure against an asset you own. For example, the secured asset can be a home, hence why it's sometimes called a "homeowner loan".
The amount you can borrow depends on lenders, loan length, interest rates and your circumstances.
Lenders will also look at the available equity (value) of the asset you're securing against the loan. They assess the difference between the asset's value and what you owe on it.
For example, deducting the amount you owe on a mortgage from your home's overall value. The result gives the lender an idea of how much it’s worth, allowing them to draw up a loan against the asset.
It's essential to know the risks involved with secured loans; it can mean losing the asset it's secured against if you don't keep up with repayments.
There are a few types and names for secured loans:
Unsecured loans (or personal loans) don't need any security. Your credit score can influence whether you can afford the loan repayments. Learn what a credit score is.
This means interest rates tend to be higher.
These loans come with a varying Annual Percentage Rate (APR) – read our APR explainer to learn more.
These can include:
Your lender must be happy with your eligibility before getting a loan.
Before applying, you should consider your income and outgoings – such as your mortgage and household bills – and how these fit in with possible repayments.
You must also think about the future: what if your circumstances change?
It's okay if neither of these are for you. Other funding options can include:
Always ask yourself if you can pay it back, when and how.
Secured and unsecured loans can positively and negatively impact your credit score.
On the positive side, taking out a loan can give you a better credit mix, which typically boosts your score. It helps build a credit history and, if you make your payments, tells lenders you're trusted to pay back on time.
Negatively, failing to make repayments can impact your credit score. Taking out a loan means a lender will perform a hard credit check on you, decreasing your score in the short term.
Typically, if you're eligible for a loan and have planned out your payments properly, it's a good way to boost your score and build credit.
Learn about how else you can improve your credit score.