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Unsecured vs secured loans

Secured and unsecured loans are very different beasts and knowing the difference between the two is vital before you make any application.

Banks and other lenders are often more willing to offer you a loan if it is asset backed – especially if the amount you want to borrow is over £25,000. 

And secured loans – which use your property as security – are often the cheapest option if you are a homeowner looking to borrow a larger amount.

However, unlike with unsecured personal loans, you risk losing your home if you miss payments on a secured loan.

Here, we explain the differences between the two loan types and look at the pros and cons of each.

What is a secured loan?

A secured loan, also known as a homeowner loan, is a credit agreement that is backed using the equity in a property owned by the borrower.

Therefore loans of this kind are only available to people who own their own homes, and can be used to borrow anything from about £5,000 to £125,000.

However, the amount you can borrow, the term and the interest rate you are offered will all depend on your personal circumstances and the amount of equity you have in your property.

What is an unsecured loan?

Unsecured personal loans are available to everyone with at least a fair credit score – you do not have to be a homeowner to apply.

Offered by most banks and other lenders, including peer-to-peer companies through which you borrow from other individuals, personal loans can be used to borrow anything from say £1,000 to £25,000.

However, they are generally at their cheapest for borrowing of between £7,500 and £15,000.

To avoid paying over the odds, it is also sensible to check the terms and conditions for fees and charges such as early repayment penalties.

Pros and cons of secured loans

Secured loans are available for much larger amounts than personal loans, which generally only go up to about £25,000.

And if you have a less-than-perfect credit history, you may find that you have no choice but to opt for a secured rather than a personal loan. As your property acts as security, they can be easier to qualify for.

The repayment periods on secured loans can also be longer, while the fixed monthly payments should make it easy to manage your repayment plan.

That’s important as failing to keep up with the repayments on a secured loan could result in the loss of your home.

To avoid paying over the odds, it is also sensible to check the terms and conditions for fees and charges such as early repayment penalties.

Pros and cons of unsecured loans 

Unsecured personal loans can be a cheap and easy way to get your hands on the cash you need.

They also offer the flexibility to choose how long you have to repay them, with most borrowers making fixed repayments for between one and five years.

Some loans even offer the option of a payment holiday of say two or three months at the start of the agreement.

However, the best loan rates are generally for borrowers looking to make repayments over three and five years, meaning you will often pay a higher interest rate to borrow over a shorter term.

The interest charges on larger or smaller amounts can prove a lot more expensive too, while the top deals are only open to those with high credit scores.

Alternatives to secured and unsecured loans

If you are only looking to borrow a small amount, say a few thousand pounds, a 0% purchase credit card could well be a better option than any kind of loan as you can borrow interest-free for up to 18 months. 

For large sums, meanwhile, it may be worth considering remortgaging to free up some cash. Mortgage rates are generally lower than secured loan rates. The downsides to this include potentially high fees and the fact you could end up paying the interest on the whole amount owed for a 25-year mortgage term. 

Find the best deal

The interest rates and terms on both secured and unsecured loans vary widely, so it is vital to shop around for the best deal.

You can do this quickly and easily by using the MoneySuperMarket secured loans and unsecured loans channels to compare hundreds of different loans from a wide range of lenders.

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