What's the difference between secured and unsecured loans?

Types of loans

A loan is borrowed money you pay back with interest over time. There are various kinds of loans you can get, which meet different needs.

Secured loans

A secured loan is a type of loan, which is backed by an asset. This asset is collateral and could be seized by the lender if you fail to repay the loan. The most common form of collateral is a property, like your home. 

Unsecured loans

An unsecured loan, also known as a personal loan is not backed by an asset. This means if you fail to repay the loan, there's no asset for the lender to seize, unlike secured loans. With an unsecured loan, the amount you can borrow is usually based on your credit profile and financial circumstances rather than the value of your asset. These types of loans tend to carry more risk for the lender.

Advantages of secured loans

Lower interest rates

Secured loans tend to have lower interest rates compared to unsecured loans. This is because the lender has the asset as a safety net, which usually leads to less risk and therefore lower rates.

Higher borrowing limits

Secured loans allow you to borrow more money compared to unsecured loans. Usually, you can borrow up to £250,000 with a secured loan. Whereas, with unsecured loans the maximum you can typically borrow is £25,000. 

Longer repayment terms

These types of loans often come with the option for longer repayment periods. Terms vary from lender to lender but generally speaking, you can borrow from 3-25 years.

Poor credit

You may still be able to get a secured loan even if your credit score isn't great. However, this isn’t always the case with an unsecured loan.

Disadvantages of secured loans

Risk of losing your asset

The most obvious downside is the risk to your asset. If you fail to repay your secured loan, the lender can take the collateral. At Central Trust, we would only ever repossess a house as a last resort, and we always work closely with our customers to try and find alternative options.

Fees
Secured loans may come with extra costs you may not be aware of. There may be arrangement fees or valuation fees. You may have the choice to either pay these fees upfront or add them to the loan. However, adding them to the loan will mean that you pay interest on these fees over the term of the loan.. If you decide to go through a broker, as opposed to going through a direct lender you may have to pay broker fees.

Advantages of unsecured loans

No risk of losing an asset

One of the main advantages of unsecured loans is that you don’t need to provide an asset as security. 

Application process

Typically, unsecured loans have an easier application process. You may not need to provide as much documentation, although the amount of documentation needed varies from lender to lender.

Faster approval times

Since there's less paperwork and no need to value an asset, unsecured loans could have quicker approval times. Therefore, you may get access to money faster than with a secured loan.

Disadvantages of unsecured loans

While unsecured loans can be a good option for many borrowers, they do come with some disadvantages. These include:

Higher rates:

One drawback is the higher interest rates associated with unsecured loans. As there is no collateral, lenders see these loans as more of a risk. This may cause them to charge higher interest rates to ease potential losses. As a result, borrowers may end up paying more in interest compared to a secured loan.

Stricter eligibility criteria:

Unsecured loan lenders tend to have stricter eligibility requirements since they rely heavily on your credit score. If you have a lower credit score, you may find it hard to qualify for an unsecured loan or may be offered less favourable terms.

Smaller loan amounts:

Usually, these loans have lower loan limits compared to secured loans.

Shorter repayment terms:

These loans often come with shorter repayment periods. While this can be useful in some cases, it may result in higher monthly payments, making it harder for some borrowers to manage.

Limited use of funds:

Some unsecured loans may come with restrictions on how the funds can be used.

Summary

Both types of loans have advantages and disadvantages, so there isn't a one-size-fits-all answer when it comes to choosing the best borrowing option. Before applying for any loan, carefully consider your situation and compare terms from different lenders to find the most suitable option.

If you are considering taking out a secured loan and would like to discuss your options with a qualified advisor, call us on the number at the top of this page or complete our enquiry form and we will call you back at a convenient time for you.

However, if you think that an unsecured loan may be the most suitable option for you, we could still help. Our sister company is an unsecured loan lender who may be able to help.