Many options are available if you’re looking to borrow money, so you must find the right choice for you and your finances. If you’ve identified that a loan is the most appropriate option for you, that’s a great start. However, an additional step needs consideration, whether to apply for an unsecured or secured loan.
We will cover the difference between the two, including the pros and cons of each.
What is an unsecured loan?
An unsecured loan is simple and easy to apply for. You borrow a specific amount over an agreed-upon period when you apply. The lender will typically assess based on your credit score and record, which will determine their decision to accept the application and the rate they offer. The lender will never secure any collateral or assets against the loan that could be at risk should you fail to meet your repayments. However, missing or defaulting on repayments could negatively impact your credit rating.
Pros of an unsecured loan
- They can be ideal if you’re looking to borrow smaller amounts. Typically, you can borrow up to £25,000.
- There is greater flexibility to borrow over a shorter period, but it’s important to consider all options, as a credit card could be more suitable depending on your needs.
- You’re unlikely to lose your home if you are unable to keep up your unsecured loan repayments.
Cons of an unsecured loan
- You typically will pay a higher interest rate if you choose an unsecured loan, as the lender has no security.
- Your credit score and financial conduct become critical as there is no additional security for the lender.
- An unsecured loan is unlikely to be suitable if you’re looking to borrow a substantial amount.
What is a secured loan?
The critical difference with secured loans is that you provide the lender security through an asset (typically property) connected to the loan. Therefore, you need to be a homeowner to apply for a secured loan and have an existing mortgage on the property. You may know secured loans by a different name, a second charge mortgage.
Just as you would with an unsecured loan, you borrow a specific amount over an agreed-upon period when you apply. The lender will review your application by considering your credit score and record. As the loan is secured against your property, it is at risk should you fail to keep up repayments on it.
Pros of a secured loan
- You can typically borrow at a lower rate as the lender will have the additional security.
- You can borrow significantly more with a secured loan. Some lenders can offer up to £1m, depending on the equity you have built up in your property.
- You can borrow over a longer period to help keep your monthly payments lower.
- You don’t always need a perfect credit score to apply for a secured loan.
Cons of a secured loan
- You must be a homeowner with a mortgage to apply.
- You may lose your property if you’re unable to maintain any mortgage or loan repayments secured on it.
- You may pay more over the period of the loan. This can be relative to the amount of money you choose to borrow. Plus, there may be additional fees to pay when borrowing on a secured basis, such as lender and broker fees.
- There may be a temptation to borrow more, which could lead to financial difficulty.
How to determine if a Secured or Unsecured Loan is right for you
As you’ve seen during this comparison, there are some similarities between the loans and plenty of differences. It’s up to you to determine which might be right for your specific needs. As a general rule, secured loans will become more appealing if you’re looking to borrow more, with lower amounts being more suited to unsecured borrowing.
A key consideration for you will be the degree of risk you’re willing to commit to with your loan. As you’ve learned, your property is at risk if you’re unable to maintain your repayments, so please carefully think about this before securing further debts against your property. That being said, if you don’t keep up your unsecured payments, there are some consequences, such as your ability to gain credit in the future.
If you’re still struggling to decide after conducting your research, it’s worth getting some advice. You can find and get in touch with an independent broker who can advise you on the best route for you.
Schedule a call with one of our trusted broker partners to speak specifically about secured loans and if they could be right for you, or get an indication of how much you could borrow.