Unsecured loans vs secured loans

Understand the differences

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

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What is a secured loan?

A secured loan, sometimes referred to as a homeowner loan, is one where the debt is linked to the borrower’s property. They are therefore only available to people who own or are buying their own homes, and can be used to borrow anything from £5,000 upwards.

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

‘Free’ equity is the difference between the value of your home and the amount you owe on your mortgage, if you have one.

What is an unsecured loan?

Unsecured personal loans are available to would-be borrowers who have at least a fair credit score – you do not have to be a homeowner to apply. They 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 of secured loans:

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

Cons of secured loans:

  • You need to keep up repayments on a secured loan or you could risk losing your home.
  • Check the terms and conditions for fees and charges such as early repayment penalties as they could increase the cost of borrowing.

Pros of unsecured loans:

  • Unsecured personal loans are widely available to a large proportion of people.
  • They 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 offer the option of a payment holiday of say two or three months at the start of the agreement.
  • 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.

Cons of unsecured loans:

  • The interest charges on larger or smaller amounts can prove expensive.
  • 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% money transfer credit card could be a better option as you can move funds from your credit card into your current account and borrow interest-free for around three years. You will, however, have to pay a fee, levied as a percentage of the amount you borrow.

For large sums, meanwhile, if you have a mortgage, 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 multi-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.

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.

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