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What is a secured loan?

Secured loans explained

Secured loans can be a way to borrow more, by using your home (or other valuable asset) as security. Understand how secured loans work in our guide with pros and cons to consider.

 

By Tim Heming

Published: 22 October 2021

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What is an unsecured loan?

An unsecured loan is a way of borrowing where you don’t have to put up any security - an asset such as your home, to get the loan.

This means that unlike a secured loan you aren’t at risk of losing your home or another high value asset, such as your car, if you cannot keep up with repayments.

But this doesn’t mean you can default on an unsecured personal loan without facing penalties. If you miss repayments or fail to pay the loan back on time or in full it is likely the lender will try and recoup their losses.

You could face penalty charges on the loan and increased interest. The lender could start legal action and you may receive a County Court Judgement (CCJ) against you. This will damage your credit rating which is likely to make any future borrowing much more difficult and expensive.

How does an unsecured loan work?

An unsecured personal loan involves borrowing a lump sum of money, typically at a fixed rate of interest. You’ll then pay back the loan (sometimes called the capital) and the interest over an agreed period of time, typically around three to seven years – although this can be much shorter or longer according to your needs

Applying for an unsecured loan in the UK is straightforward. You’ll need to be aged 18 or over and able to prove you are a UK resident. But unlike a secured loan you won’t need to put down a valuable asset or collateral as security on the loan.

You can search for loans and compare deals with MoneySuperMarket – and we’ll also show you your chances of being accepted without having any effect on your credit score. That’s because we use what is known as a ‘soft search’ which doesn’t leave a mark on your credit file.

But after you apply for a loan the lender will do a full credit check on you and will want to see evidence of your regular income – to be confident that the loan is affordable.

Once your application is accepted, you’ll receive the funds from the loan provider. The monthly loan repayments will start immediately and last until you have cleared the debt at the end of the loan term.

What can I use an unsecured loan for?

Unsecured loans are used for a range of purposes. Your lender will usually ask what you want the loan for. Typical examples include for a car, home improvements, debt consolidation, a holiday or a wedding. As with any borrowing, always make sure you can afford the repayments.

How much can I borrow with an unsecured loan?

Unsecured personal loans generally range from around £1,000 to £25,000 depending on the lender. But how much you can borrow will depend on your individual circumstances including your earnings, outgoings and credit score.

If you need to borrow a large amount you may have to opt for a secured loan. With a secured loan the lender has the security of knowing that should you be unable to pay it off, they can seize your assets - this is usually your home.

What are the advantages and disadvantages of getting an unsecured loan?

Advantages of an unsecured loan

  • Open to all. You don’t need to be a homeowner and offer up the security of a house or other valuable asset to get the loan
  • Quick and simple process: The loan application process is often quick and straightforward because you’ll only need a credit check and to evidence your income. As it is not a secured loan you won’t have to offer any security, such as your home, and have this valued, for example, which can take longer

Disadvantages of an unsecured loan

  • Higher interest rates. Because you’re not putting down any security against the debt, as happens with a secured loan, you may find lenders charge a higher interest rate
  • Smaller loan. You may be limited in how much you can borrow on a personal loan compared to a secured loan

What is the difference between a secured and unsecured loan?

An unsecured personal loan does not require you to put up a valuable asset – such as your home – to act as security in case you cannot meet your debt repayments.

You may be able to borrow more on a secured loan, and potentially at a lower interest rate. Our guide on unsecured loans versus secured loans explains more.

What do I need to consider before taking out an unsecured loan?

Do I need the loan?

When you take out a personal unsecured loan you’ll be paying interest back on the borrowing – so it means you’ll pay back more in total than you borrowed. Consider whether you need to borrow the money or whether the purchase could wait until you have saved up the cash. Paying up front in cash will be cheaper.

Can I afford the repayments?

The lender will run a credit check to satisfy itself you can meet the repayments on your loan. But you should also be confident you can afford the monthly repayments and that taking out a new loan is not going to over-stretch your finances.

Use our handy loans calculator to work out how much you’ll be paying back each month, or how much you could borrow based on what you can afford to repay.

You might find that paying lower monthly repayments over a longer period is more manageable, although this typically means you’ll end up paying back more in interest overall.

Am I getting the best rate?

Whatever personal unsecured loan you take out, make sure you get the best deal for your needs. Comparing the interest rate or APR, which equates to how much the loan will cost you each year, is a good place to start.

Also review the terms and conditions. Are there any other fees on the loan, and what is the early repayment charge? You’ll need to know this fee if you think you may want to pay back the loan early.

What happens if I can’t pay back my unsecured loan?

If you miss the repayments on your unsecured loan you’ll find the interest mounts up and you can also be hit with late payment fees.

If you’re struggling to meet repayments, speak to your lender and see if there’s a way you can restructure the loan.

Lenders will approach the situation differently and it will depend on your personal circumstances, but they might be able to offer a payment holiday for a time, or extend the term of the loan to bring down the monthly repayments.

If you cannot pay your loan back at all and are forced to default, then you could face a County Court Judgement (CCJ), which will damage your credit rating and make it more difficult to borrow in the future. Seek help as soon as possible. There are a number of free and independent debt charities, such as National Debtline and Citizens Advice, that can help in this situation.

Alternatives to an unsecured loan

There are a number of alternatives to an unsecured personal loan. These include:

Secured loans: Similar to an unsecured loan, but with a secured loan you’ll put down a high value item, usually your home, as security. For this reason they are sometimes also referred to as homeowner loans.

Guarantor loans: A family member or friend must agree to be the guarantor on your loan. This means that in the event you cannot meet the repayments the lender can ask them to repay. Both you and your guarantor are legally liable for the debt. While this can make borrowing more accessible, particularly for those with a poor credit history and low credit score, there are big implications for the guarantor so it is vital they fully understand their commitments under the agreement.

0% interest purchase credit card: If you only need to borrow funds for a short period to make a purchase and are confident you’ll be able to repay quickly, a 0% purchase credit card could be useful. It allows you to spend for a limited period, ie. three months, without accruing any interest on the debt. Just be sure you’ll be able to clear the balance at the end of the 0% period otherwise you’ll end up paying interest on the debt.

Compare unsecured loans with MoneySuperMarket

Comparing personal loans with us is quick and easy. Just tell about yourself, your financial situation and the type of loan you’re looking for and we’ll compare deals from our leading panel of providers.

We can show you the most suitable deals for your needs and comparing won’t affect your credit score in any way.

 

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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