Secured vs unsecured loans: Which is better?

Choosing unsecured or secured is rarely a matter of choice – your circumstances or needs will typically make the decision for you.

Getting a loan is a very common way to achieve a life goal – be that a new car, consolidating debts or building an extension. When you’re looking into your options, there’s a good chance you’ll come across 2 common types: secured and unsecured. Here are the key differences and the need-to-knows!

At a glance

  • Securing a loan against, say, your home means you could lose that asset if you fail to repay the loan.
  • Borrowers only opt for secured loans to access larger sums or more competitive rates, and the extra security for the lender can offset a weaker credit score, to an extent.
  • Like traditional mortgages, secured loans can help you unlock hundreds of thousands of pounds of equity currently locked away, but take a bit longer to arrange and involve fees.
  • Secured loans are also known as “second charge mortgages”, and can be popular with borrowers who don’t want to disturb their main mortgage (perhaps because it has a fixed, low rate that’s hard to beat).
  • If you’re borrowing less than £20,000 and have decent credit, an unsecured loan is likely to be better as it would be faster and involve fewer fees.

What is a secured loan?

A secured loan is secured against an asset which you own in full or in part. This asset is usually your house, but it could be land or a vehicle. Find a willing lender, and it might even be that football team you own, or your helicopter/speedboat. If you’re unable to repay the loan, then in the worst cases, the lender can choose to sell the asset to recoup its money. So the brutal reality is that when you secure a loan against your house, you could end up losing it.

For this reason, secured loans are generally considered to be higher risk and it’s important to know what you’re getting into.

A secured loan enables you to borrow a large sum of money over a set term, typically anywhere between 3 and 25 years. The amount borrowed is repaid in monthly instalments, which comprise part of the original sum borrowed, plus interest added on top.

Exactly how much you can borrow with a secured loan will depend on your credit score and income, and of course the value of your asset – usually the amount of equity in your home. The “equity” is the value of your property, minus the amount you owe on your mortgage. If you have very little equity in your home, you’re likely to find it harder to get accepted for a secured loan.

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What is an unsecured loan?

An unsecured loan (often simply called a “personal loan”) also lets you borrow a lump sum of money to be repaid in fixed monthly instalments over a set term. The amount you can borrow is usually lower than with a secured loan. For example, you can typically borrow up to £25,000, although some big banks may stretch this a little higher for existing customers with excellent credit and high incomes. Terms for unsecured loans are usually shorter, too – say between 1 and 7 years.

Interest rates for unsecured loans are usually higher compared to secured loans. But, unlike with a secured loan, you don’t need to secure the amount borrowed against an asset. For this reason, they are theoratically less risky for you, the borrower (but higher risk for the lender). In reality, should you fail to repay an unsecured loan the lender could still seek to reclaim its money through assets you own.

Compare unsecured loan rates

Pros and cons of a secured loan

Pros

  • You can typically borrow a larger sum of money.
  • You can borrow over a longer term, which means your monthly repayments will be lower.
  • Monthly payments may be fixed initially, making it easier to budget.
  • Because you need to secure the loan against an asset, they can be easier to get accepted for.
  • Again thanks to that security for the lender, your interest rate can be more competitive.
  • You could unlock more equity from your home without disrupting your existing mortgage.

Cons

  • You’ll typically need to be a homeowner with a decent amount of equity to qualify (or have some other valuable asset lenders could use as security).
  • Your home (or other asset) is at risk if you are unable to keep up with your repayments.
  • Longer repayment terms mean you’ll pay more in interest overall.
  • Should you decide to pay off your loan early, early repayment charges could apply.
  • Product fees and broker fees usually apply (but can be bundled in with the loan).
  • Like a mortgage, after any introductory period the loan will revert to a variable rate.

Pros and cons of an unsecured loan

Pros

  • Monthly repayments are fixed, making it easier if you’re on a budget.
  • Interest rates can be competitive, particularly on sums of £5,000 or more.
  • As the loan is unsecured, you do not have to use an asset such as your home as collateral, making it less risky.
  • You will be able to select the term of your loan when you apply – usually between 1 and 7 years.
  • There are usually no fees involved.

Cons

  • Interest rates tend to be less competitive for smaller sums of around £2,000 to £3,000.
  • Because terms for unsecured loans are shorter compared to secured loans, monthly repayments can be higher.
  • You can’t borrow more than around £25,000.
  • If you repay your loan early, you might be hit with an early repayment penalty which could be the equivalent of 1–2 months’ interest.

What to consider before taking out a loan

Before taking out any type of loan, it’s important to consider how much you can realistically afford to borrow. Only ever borrow a sum you are confident you can repay.

Always carry out some calculations before you apply to see what the monthly repayments will be and check that you’re comfortable with them. This is even more important if you’re considering applying for a secured loan as your home will be at risk if you can’t keep up with your repayments.

Alternatives to secured and unsecured loans

There are a number of alternatives to secured and unsecured loans that are worth exploring before making your decision. For example:

A 0% purchase credit card

This type of credit card enables you to spread the cost of a purchase interest-free over several months. It can be a flexible way of paying for an expensive item, but keep in mind that if you do not pay off your balance in full by the time the 0% deal ends, interest will kick in. You’ll also only be able to borrow up to your credit limit and this will depend on factors such as your credit history and income. The best deals will be reserved for those with good credit.

Compare 0% purchase credit cards

A 0% money transfer credit card

A 0% money transfer credit card enables you to shift money from your credit card straight into your bank account. You can then use these funds for whatever you need and you’ll make monthly repayments to your card provider. With a 0% card, you won’t pay interest for a number of months.

The downsides include that you’ll only be able to borrow up to around 90–95% of your credit card limit which may not be sufficient and you’ll usually pay a transfer fee of around 3–4%. What’s more, if you don’t clear your balance by the time the 0% deal ends, you’ll start paying interest.

Compare money transfer cards

Remortgaging

Another way to get access to additional funds is to remortgage, but you’ll need to have enough equity in your property to do so. When you apply for a new mortgage, you’ll need to add the amount you want to release to your new deal.

For example, if your home was worth £200,000 and you had an outstanding mortgage of £150,000, you’d have £50,000 in equity. If you wanted to borrow £30,000 of this, you could ask your lender to remortgage for £180,000 rather than £150,000.

However, this option is only likely to be suitable if you don’t have to pay an early repayment charge to get out of your existing mortgage deal early (or if your existing deal is about to end). Also keep in mind that your monthly repayments will likely increase.

Compare remortgage rates

Guarantor loans

If you have poor credit, you could also consider a guarantor loan. With this type of loan, a family member will need to agree to be your guarantor. This means that should you be unable to keep up with your repayments, your guarantor will step in and pay them for you.

However, keep in mind that guarantor loans are often more expensive.

Compare guarantor loans

Frequently asked questions

Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
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