In this guide we will outline the key differences between secured and unsecured loans. We’ll weigh up the advantages of both and offer advice to help you decide which type of loan is best for you.
What is a secured loan?
When someone takes out a secured loan they will generally have to pledge an asset (usually their home/property) as a security to the lender. This means that if they fail to keep up with repayments the lender can repossess the security to recoup the amount borrowed.
Types of secured loans include second-charge mortgages, homeowner loans and home equity loans. The security can sometimes be referred to as ‘collateral’.
This type of loan is for homeowners and can be suitable for people with bad credit or who want to borrow a larger amount- typically more than £10,000.
Advantages of a Secured Loan
- Secured loans can be easier to be approved for, even if you have bad credit or little credit history.
- They are generally suited for larger purchases, for example buying property or making home improvements.
- You usually borrow over a longer period of time allowing you to stretch the payments further.
Disadvantages of Secured loan
- You normally need to be a homeowner to qualify
- If you fail to keep up with repayments of default on your loan then you could risk losing your home.
- There can also be early repayment charges so always check the terms of your agreement.
What is an unsecured loan?
An unsecured loan is commonly referred to as a ‘personal’ loan. This type of loan is available to almost anyone with a fair credit score, and they don’t necessarily need to be a homeowner.
Unlike a secured loan, the borrower does not need to pledge a security to the lender (like a home/property). Typically an unsecured loan is for small to medium amounts up to around £25,000 but this can vary.
Advantages of a unsecured Loan
- You don’t need to offer a security to the lender (such as a home or other asset).
- They are widely available to most people with a fair credit score.
- Usually they are flexible in terms of the borrowing period and repayment options.
- Typically they are offered with a fixed rate (APR) so you know exactly how much you will be paying back.
Disadvantages of unsecured Loan
- You might struggle being accepted for one if you don’t have a reasonable credit score.
- Borrowing larger sums (greater than £20K) might not be possible.
- If you miss repayments then you could incur penalty fees and damage your credit score.
Final thoughts and advice.
It is crucial to ensure that you can afford the repayments (as well as your general living expenses) before taking out any kind of loan.
Both secured and unsecured loans can be suitable for multiple purposes. It’s important that you consider how much you need to borrow and also what your personal circumstances are.
Our top advice would be to always shop around. Never accept the first offer that you receive from your bank or building society as there are many more deals out there and the interest rates can vary hugely.
CompareTop10 is a great place to start your loan search. Using our smart loan search you can receive personalised rates from over 30 banks and lenders in minutes. Completing a search with us won’t affect your credit score and it’s obligation free.