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Secured vs Unsecured Loan – What’s the Difference?

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Nov 15, 2022

What’s the difference between a secured loan and an unsecured loan?

All loans, regardless of type, fall into one of two categories – secured or unsecured. Both forms of borrowing allow you to access financing from lenders, with interest and monthly repayments, over a fixed duration.

That said, both secured and unsecured loans have a number of distinct differences, most of which have to do with the amounts prospective borrowers can access, the level of risk they present, and their respective interest rates.

Secured vs unsecured loan – What’s the difference? This guide explores everything you need to know about them.

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What is a secured loan?

A secured loan (sometimes referred to as a homeowner loan) is exactly what it sounds like. It is a debt instrument that requires the individual to provide the lender with a valuable asset as collateral for the loan.

More often than not, this asset will be your home or any other property you own, although it could also take the form of a vehicle or valuable piece of art, antiques, or jewellery.

The idea behind a secured personal loan or business loan is to give lenders a measure of security, effectively reducing their risk exposure should the borrower default on their loan obligation.

The lender would be within their right to dispose of the asset and use proceeds from the sale to offset the amount owed on the home loan balance, should the borrower default. Any cash left over from the sale and recovery is reverted to the borrower.

Due to the lower risk secured personal loans present to lenders, they often come with lower interest rates than unsecured debt.

Prospective borrowers with a poor credit history are also more likely to be approved for secured loans than unsecured loans. However, it is at the lender’s discretion to decide whether or not to offer the loan.

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What is an unsecured personal loan?

An unsecured loan, also referred to as a personal loan, does not require the borrower to provide collateral before they can access funding. This form of borrowing tends to be more straightforward than the process involved in secured lending.

Unsecured loans offer lower risk to borrowers since they don’t have to worry about losing their assets when they miss payments on their loans. On the flip side, lenders take on more risk, which means they attract higher interest rates overall than secured loans.

An unsecured business loan or personal loan allows borrowers to access funding from lenders solely based on their credit rating and existing financial circumstances as opposed to the value of the asset they put up as collateral.

A good credit score tells lenders that the borrower is creditworthy based on their solid track record of making timely repayments on credit extended to them.

It shows them that if your borrow money you are likely to repay the loan in full and on time, subsequently increasing your likelihood of getting your application approved and enjoying competitive interest rates.

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What loan amount do I qualify for with a secured vs unsecured loan?

When choosing between secured or unsecured loans, the amount you can borrow varies by lender and takes into account several factors. Some lenders offer unsecured loans of up to £50,000. Others offer less.

Remember, the only thing loan providers have to go on when assessing the loan amount to offer you is your credit history. They have no assets, such as a property or vehicle, that they can dispose of to recoup their money if a borrower was to default on their loan. As a result, they absorb a significant amount of the risk.

The lender’s risk appetite also plays a role in the loan amount borrowers qualify for. Some loan providers, particularly the high-street variety, would never consider giving an unsecured personal loan to someone with bad credit.

On the other hand, niche providers that specialize in bad credit lending have a higher-than-average risk appetite and would approve a loan application from an individual with a poor credit history, provided they fulfil their lending criteria.

Secured loans allow borrowers to unlock a higher borrowing limit depending on the value of the asset they put up as collateral. Lenders usually cap the maximum loan amount an individual can qualify for. It is calculated as a percentage of the value of the asset or home equity if you’re putting up your property as security.

Let’s say you have £125,000 worth of equity in your home, and the provider’s lending criteria allow you to access up to 80% of this value. It means you would qualify for a £100,000 secured home equity loan.

Lenders enjoy lower risk exposure from secured loans since they have an asset they can dispose of to recoup their losses should a borrower fail to keep up with their repayments.

This is the reason why individuals can borrow large sums of money at lower interest rates and with longer repayment terms compared to borrowers taking out unsecured loans.

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What do I need to know before taking out a secured vs unsecured loan?

You must keep four key things in mind when applying for a loan.

  • Security: Secured loans require that you put up an asset as collateral. Unsecured loans do not. If you default on a secured loan, the lender is at liberty to sell off your property, vehicle, or any other asset you put up as security to recover the monies owed to them. Unsecured loans pose no risk to your assets.
  • Amount required: If you need to borrow a larger sum of money and have an asset you can leverage to do so, then a secured loan would be your best bet. Unsecured loans pose a higher risk to lenders, so the maximum loan amount you qualify for will generally be lower than what you would get with a secured loan.
  • Interest rate: The fact that you put up an asset as collateral to get a secured loan reduces the lender’s overall risk exposure. All they would have to do to recoup their losses is sell the asset. For this reason, the interest rates on secured loans are generally lower than their unsecured counterparts.
  • Credit rating: If you have bad credit, you will have a harder time qualifying for unsecured loans. However, you stand a much higher chance of getting approved for a secured loan if you have an asset you can put up as collateral, despite your adverse credit history.
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What are the main differences between secured loans vs unsecured loans?

Secured loans

Unsecured loans

Collateral These require the borrower to put down a valuable asset as security for the loan No form of collateral is required, which increases the lender’s risk
Loan amount Secured loans allow borrowers to qualify for larger sums of money Lower loan limits are available
Loan term Longer loan repayment terms Shorter repayment terms
Interest rate Some lenders offer variable rates, meaning the monthly repayments may also vary These have fixed rates and monthly repayments
Loan costs Secured loans have higher set-up fees compared to unsecured loans Little to no set-up fees
Credit score Ideal for individuals with bad credit Borrowers with good credit tend to enjoy better lending terms
Approval time There’s a lot of paperwork and due diligence involved, which means longer approval times Shorter approval times, so borrowers receive the cash quickly
Risk to the borrower Defaulting on the loan could result in the loss of your asset and a lower credit score Defaulting on the loan will impact your credit rating but poses no risk to any asset you own
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What can I use secured vs unsecured loans for?

While most lenders don’t typically ask what you intend to use the loan for, this information may be required as part of the application process.

Some common reasons why individuals take out unsecured loans include the following:

  • Making an expensive purchase such as new home appliances
  • Buying a new vehicle through a car loan or auto loan
  • Funding a holiday
  • Paying for an event such as a wedding
  • Settling medical expenses
  • Debt consolidation for smaller amounts of credit

If you need to access a larger sum of money, secured personal or business loans would be ideal if you need them for:

  • Secured business loan for cash flow injection
  • Buying expensive machinery for your business
  • Carrying out home renovations
  • Debt consolidation for student loan balances, credit card bills, prepaid card balances, personal loans, and other forms of credit financing

Get expert help from a bad credit loan broker

Poor credit should not get in the way of securing the required funding. If your previous applications for secured or unsecured loans were rejected, consider getting help from a bad credit broker. They have insider knowledge of the loan market and will link you to lenders that will likely approve your application.

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FAQ

What is the difference between a secured vs unsecured loan?

A secured loan, sometimes referred to as a homeowner loan, is a form of borrowing where the debt gets linked to any valuable collateral, such as a property or vehicle.

These loans can be used to access larger sums of money from lenders and usually attract lower interest rates and longer repayment periods. If the borrower fails to pay off the amount, the lender can dispose of the asset and use the proceeds from the sale to recoup the loan balance.

An unsecured loan, also referred to as a personal loan, does not require the borrower to put up an asset as collateral.

The lender simply assesses the individual based on their credit report rating, income and expenditure, and current financial situation to determine the loan amount they qualify for.

Should I get a secured vs unsecured loan?

The answer to this question depends on several factors. Your individual circumstances will determine the loan amount you require and whether or not you meet the provider’s secured or unsecured lending criteria. Some of the questions you need to ask when determining which loan to apply for include the following:

  • The amount you want to borrow is based on what you want to use the funds for, e.g. debt consolidation vs business expansion
  • What a comfortable repayment term looks like to you
  • Your current financial situation
  • Your credit history

If you need to borrow a larger sum of money and have a valuable asset you can use to back your debt, then a secured loan would be the way to go. If you have bad credit, a secured loan would also be your best bet.

On the other hand, if you have a good credit history and perhaps lack an asset you can use to secure financing from a lender, your only option would be to apply for an unsecured loan.

Are there alternatives to secured vs unsecured loans?

If you need money, a secured and unsecured loan isn’t your only option.

Consider using any of the following credit avenues:

  • Guarantor loan: This is a form of secured debt where a family member or friend acts as a guarantor of your debt. They would be liable if you default on the loan and are generally used by individuals with bad credit and can be accessed through a credit union accredited by the Financial Conduct Authority (FCA).
  • Remortgaging: If you need a substantial amount of money and have a mortgage, you can remortgage your home to free up some equity and qualify for personal or business loans.
  • Credit cards: Credit cards are a great alternative to secured and unsecured loans if you need fast cash without long, drawn-out approval processes.

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