When you’re looking at borrowing money via a loan, you’ll find two main types; secured and unsecured. At a glance, the main difference here is that secured loans are borrowed against an asset, most commonly your property whereas an unsecured loan is not held against an asset. 

Both offer pros and cons, so it’s important to look carefully at which kind of loan might be best for you and what the differences between secured loans vs unsecured loans are. 

What is the difference between secured and unsecured loans? 

When picking the right loan for your financial situation, it is important to know the options you have. Here are the main differences between a secured vs unsecured loan. 

Collateral 

The biggest difference between the two loan types is that secured loans have to be backed by collateral. Mortgages are a type of secured loan, where the property you purchase is the collateral. This simply means the lender has a means to get their money back if you as the borrower fail to make the agreed repayments. While this is a really important thing to consider and might make a secured loan seem scary, regulated lenders will work closely with their customers to avoid this where-ever possible.  

An unsecured loan does not need any collateral. The loan is based on your financial situation, income and outgoings and credit history. This of course means that none of your property is at risk if you default on the loan, but you will still face issues if you miss your payments. 

Borrowing terms 

Secured loans often have much larger limits, in some cases up to one million pounds, however this largely depends on the asset you’re securing it against, as well as your personal financial circumstances. The term (or timeframe) for you to pay the money back is often much longer on a secured loan and the borrowing can be split across decades. Of course, the longer you pay it back the lower your monthly repayment will be, but the more you could pay in interest over the whole course of the loan. 

Unsecured loans on the other hand tend to be restricted to maximum loan sizes of around £25,000 but again this is dependent on the lender and your financial situation. The repayment period for these loans tends to be limited to seven years, meaning for larger loans the monthly repayment can be quite high, 

What can you spend your money on 

Secured loans or second charge mortgages can usually be used for any legal purpose. They are typically used to consolidate debt, fund home improvements, purchase cars, camper vans or second homes and even to cover large tax bills. It is always worth considering if the expense you have in mind is something that you are happy to use your property as security for. 

Unsecured loans tend to be for much smaller amounts of money and therefore are used for smaller purchases. Much like secured loans, there are usually very few restrictions on what they can be used for. However, lenders are unlikely to approve them for things like student loans or starting a business. It is worth finding out what uses your lender accepts for personal loan applications before you apply. 

Taking out the loan 

Unsecured loans are often arranged through your bank and can be quick and straightforward to arrange. Whilst this can be convenient for you, this means that they are usually arranged without advice, which could mean that they are not always ideal for your needs. Your suitability is worked out based on what the lender knows about you already, as well as details that they might ask for, such as information on other loans and your credit history. You can often get the money in your account only 24-48 hours after starting the application. 

Secured loans will normally be arranged through a broker, who will complete research of your situation and then arrange to support you through the application process. Most secured loans are provided by specialist lenders like Pepper Money. This is because their operations are geared up to understand this more complex type of lending. In most cases, because the loan is secured against the property, the lender will arrange for a valuation and will also have to register the loan with the land registry. They may also ask for proof of income and information on your other debts. All of this can mean it takes longer for the loans to complete, however the end to end process is likely to be quicker than you think, with some customers receiving the money in as little as 3-days. 

Which loan is right for me? 

Choosing the right loan is an important part of ensuring your financial security for the future. The right loan will depend on your situation. For example, if you need to borrow a larger amount than you can get through an unsecured loan, you may want to look at secured borrowing. Alternatively, you may want to consider whether or not you are comfortable using a property as collateral for your loan. 

If you are struggling to work out what loan type is best for you, getting professional financial advice can help make sure that you make the right decision. Finding a good broker can also help you weigh up your options and find the right kind of borrowing for your needs. Brokers can also help you look at lenders that are not on the high street. 

Things to consider before applying for a loan 

Whether you decide to apply for a secured or an unsecured loan, there are a few things that you should think about before putting in your application. For example, you should consider: 

  • Your financial situation 
  • How much money you need to borrow 
  • The available interest rates on different types of loans 
  • Whether you can improve your credit score to get better terms 
  • What monthly repayments you can manage 
  • Whether you are comfortable using your property as collateral