Secured Vs unsecured Loans

Key takeaways

• Loans can be secured, requiring collateral, or unsecured, which do not require collateral

• Unsecured personal loans are a popular way of borrowing money. Loan amounts typically range from £1,000 to £25,000, but the best rates are often for loans between £7,500 and £15,000

• Secured loans are backed by assets, such as property or vehicles. If a borrower defaults the lender can repossess the asset, which usually translates to lower interest rates for the borrower

• Secured loans typically allow people to borrow larger sums and lower rates, while unsecured loans offer flexibility and no risk to personal assets

What's the difference between a secured loan and an unsecured loan?

Secured loans and unsecured loans both come under the banner of personal loans. But the critical difference between them is that with an unsecured personal loan, you don't have to put up any collateral as security.

Conversely, with a secured personal loan, you're required to secure the loan against an asset. That could be a house, jewellery or a car, for example. If you fail you to make your monthly payments on time and in full you're at no risk of having your home, vehicle, or other asset repossessed.

Pros and cons of unsecured loans

Pros

• Unsecured loans can be easier to get if you don't have any collateral to put up as security. All you'll typically need is a regular, verifiable income and a good credit score

• Because there's no collateral to put up, there's no risk to your personal assets. Although a lender may still take action against you if you fail to make your monthly payments

• Unsecured loans usually offer a fixed rate of interest for the entire duration of the term. That means you'll be able to budget more effectively, because you'll know exactly how much you'll need to find each month for your loan repayment

• The loan application process is usually quicker and easier than with a secured loan. Consequently, you should be able to gain access to the funds you need faster

• Unsecured loans are usually more flexible and it's often easier to pay off the loan early, if you suddenly find you're able to afford to. That could spell significant savings, since you'll be paying less in interest

Cons

• Lenders will usually advance you less money than with a secured loan, because you've not provided an asset as security

• You may be offered higher interest rates (APRs) than those on offer with secured loans

• Repayment terms tend to be shorter. Usually a year or two, but with a typical maximum of five years

Pros and cons of secured loans

Pros

• You can usually borrow larger amounts. Our homeowner loan partner, for instance, will advance borrowers up to £100,000

• They are available to those with less-than-perfect credit histories. That's because lenders are less worried if you default, because you've put up an asset as security

• You can usually negotiate longer repayment periods

Cons

• If you fail to make your monthly repayments, your collateral is at risk. So make sure you stress-test your finances before taking out a secured loan, in case your circumstances change and your household income falls

• Because you're usually repaying a secured loan over a longer period, you may end up paying more in interest overall

• Rates on secured loans are often variable. So your monthly payments could rise and fall in line with the base rate of interest. In turn, that means, you won't have the benefit of knowing exactly how much you'll need to pay every month

How do loans work?

The process of securing a loan typically looks like this...

1. Apply for a loan: Your loan application will require you to provide personal and financial information. This is so that the lender can assess your borrowing capacity and creditworthiness

2. Pass a credit check: lenders will look closely at your credit report and credit score to determine your loan terms, including how much they will lend you, over what term and at what rate

3. Lender's offer: Based on your credit score and personal circumstances, the lender will propose an interest rate and repayment term. It's essential to review this offer carefully to ensure it aligns with your financial situation

4. Making repayments: Assuming you're approved, the lender will usually deposit the loan directly to your bank account within a few days. You're then obliged to make monthly repayments within the timescale they've set, until the loan is paid off

How much can I borrow with an unsecured loan?

Unsecured personal loans offer a straightforward way for individuals to borrow a set amount of money, typically from around £1,000 to £25,000.

It's worth noting that the best or lowest rates are often reserved for loans between about £7,500 and £15,000, making them an attractive option for many borrowers.

How much can I borrow with a secured loan?

You can generally borrow more with a secured loan than an unsecured loan. By way of example, our homeowner loan partner, Fluent Finance, will lend up to £100,000.

What should I consider before choosing a loan?

What are the alternatives to secured and unsecured loans

If you're in need of money, it's wise to consider other borrowing options. Alternatives include:

• 0% money transfer credit card: Ideal for borrowing small amounts, this option allows interest-free borrowing for a set period

• Remortgaging: For larger sums, remortgaging can offer lower rates, though it comes with longer repayment terms

• Guarantor loans: Suitable for those with poor credit scores, these loans involve higher interest rates and the risk of burdening the guarantor

• Borrowing from family and friends: This can avoid credit checks and interest, but it may risk personal relationships if repayment becomes an issue

Kara Gammell
Personal Finance & Insurance Expert

Our expert says

"Taking on debt need not be scary and can be a good way to get money for a major purchase or simply to help your cashflow. But you do need to be careful not to borrow more than you can afford to repay.

"Ask yourself how much risk you are willing to take, and how you would keep up with repayments if your circumstances changed."

Other useful guides

For further information on loans, you might find these guides helpful:

• Different types of loans explained

• How to get a loan with a poor credit score

• What is a loan

Comparing loans with MoneySuperMarket

It's essential to shop around for the best loan terms to suit your needs. MoneySuperMarket offers a comprehensive comparison service for various loan deals, performing a 'soft search' that doesn't impact your credit score.

This allows you to explore your options without any negative consequences on your credit report.

MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.