Secured vs unsecured loans
Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
18th January 2021
4 minute read
Your personal loan can be ‘secured’ against an asset such as your home, meaning that if you fail to repay the loan, your home can be repossessed. On the other hand, an unsecured loan has been leant to you purely on your creditworthiness, but that doesn’t mean you can’t be penalised for failure to repay.
When looking at personal loans, it’s important to be clear which type of loan is right for you before you tap that apply button. That’s why we’ve put together a short guide on the difference between secured and unsecured loans.
What’s the difference between secured and unsecured loans?
As mentioned above, the main difference is the fact that a secured loan requires an existing asset to be included as collateral in case you fail to repay the loan. An unsecured loan is therefore any other personal loan that does not need to be secured against an asset.
It depends on your credit score as to whether you will be eligible for either loan type. It’s always worth checking not only your credit report but also your eligibility using a comparison tool such as moneymatcher, before you apply for any financial product.
In general, an unsecured loan relies on your credit score without any collateral, so you would usually have to have a good credit score to be accepted (depending on the specific loan offer). Since a secured loan also relies on a valuable asset, it means you still might be eligible if you have bad credit.
We can further define the differences between secured and unsecured loans by explaining the details of each separately.
Secured loans explained
- The loan is secured against a valuable asset such as your home or car
- Interest rate represented as APRC (Annual Percentage Rate of Charge)
- Tends to be for a higher amount
- Loan term tends to be longer
- Higher risk for the borrower as the asset could be repossessed
- Bad credit score can be accepted
As you can see from the summary above, a secured loan is often taken over a long period and for a large amount of money. In this regard, the borrower needs to be sure that they can make all of the payments over this long term, since failure to repay can result in your asset being repossessed.
A secured loan can often be an option for those with bad credit, since it is less of a risk for the lender. Even if you are eligible for a secured loan, it’s still worth exploring other options, such as a bad credit loan, or even taking steps to improve your credit score. Having a higher credit score will grant you access to more favourable financial products in the future, especially if you are thinking of applying for a mortgage.
Read more about secured loans here, or start your search using the button below.
Unsecured loans explained
- The loan is not secured against an asset
- Interest rate represented as APR
- Can be repriced based on your credit history
- Tends to be for a lower amount
- Loan terms tend to be shorter
- Lower risk for the borrower but can still be penalised for missed payments
- Good credit rating often required
There are many options of unsecured loans, including personal loans, car loans, bad credit loans, home improvement loans, guarantor loans and short-term loans. While each of these loan types will appeal to a certain customer, they should all be based on a credit score, rather than having to have any assets used as collateral.
While there is less risk when taking out an unsecured loan, that doesn’t mean you won’t be penalised for missing repayments. You will normally receive an additional fee for missing a payment, and multiple instances can lead to further charges and even a CCJ on your credit file, which can damage your chances of getting financial products in the future.
Read more about unsecured loans here, or use the button below to start your search.
Alternatives to loans
Depending on your circumstances, you might feel that a secured or unsecured loan isn’t the right option for you, but you would still like to borrow money. Have a look at the following options below to see if you could still borrow money without having to apply for a loan.
- Get a credit card – whilst a loan supplies you with a lump sum you can use straight away, a credit card is a bit more of a flexible borrowing option, allowing you to spend up to a certain amount while making monthly repayments. You might want to consider cards including 0% balance transfer, 0% purchase, rewards, travel or even a credit builder card to increase your credit score
- Apply for an overdraft – getting an overdraft can be another flexible alternative to getting a loan, allowing you to have an extension to your current account. Most overdrafts will charge a small fee, apart from student overdrafts that are normally free
How do I get the right deal?
If you’re thinking of taking out a secured or unsecured loan, there are a number of things you should consider so that you can get yourself the best deal:
- Interest rate – the use of APR makes it easier for customers to compare different loan products and find out which would be the best for them. The lower the interest rate, the less you have to repay overall. You can find out more about interest rates and repricing here
- Loan term – this is also a big consideration, as you might not want to make repayments for 5 years when you could easily repay the amount in 3 years, for example. Consider your own income and how much you can comfortably pay back to calculate what your preferred loan term would be
- Credit rating – there will usually be an indication of whether a particular loan requires a good credit rating, or allows customers with a low credit score to still apply. Once you’ve checked your credit report, this will then give you an idea of which loan would still give you a good deal, based on your individual credit score
- Representative example – to fully understand a loan offer, it’s worth reading the representative example to give you an idea of what your repayments might look like based on the amount you’re borrowing. If your lucky you might find that the example shows the exact amount (or close enough) that you would like to borrow
Secured vs. unsecured loans
Now that you have all the information to hand, it might make it a little easier to decide which type of loan is for you. Remember to always check your credit score and use our free eligibility checker, moneymatcher, to make your search for a loan even easier.