Secured Vs Unsecured Loans

There are so many different types of loans available, and the one that’s best for you will depend on your own circumstances and credit score. While unsecured loans are one of the most common, secured loans are also an option for those looking to borrow money. Below we highlight the main differences.

What is a secured loan?

A secured loan is a type of credit that uses something belonging to the borrower as a form of collateral, such as a house or a vehicle. In the event the borrower doesn’t keep up with their repayments, the lender can obtain a court order allowing them to repossess and sell the collateral in order to reclaim the money.

How do secured loans work?

While the loan is secured against property or a vehicle, the repayments and interest charges usually work in the same as any other type of loan. The difference is that your home or vehicle may be at risk of repossession if the repayments aren’t kept up to date.
Pros and Cons of Secured loans

  • Need to be able to provide collateral
  • Your home or vehicle may be at risk
  • Larger loans over longer terms are available
  • More easily accessible to those with little to no credit history

What is an unsecured loan?

An unsecured loan is otherwise known as a personal loan. No collateral is required for this form of credit so the risk to lenders is higher than a secured loan. In the event of non-repayment, this type of loan will usually incur extra interest, fees and possible legal action in order to recover the money lent.

How do unsecured loans work?

Loan repayments are usually made each month on a date chosen by the borrower. These will be made up of the loan amount plus interest and any fees divided by the loan term chosen.
Pros and Cons of Unsecured loans

  • Higher rates of interest
  • Those with poor credit may not be accepted
  • No risk to home or vehicle
  • Suitable for smaller loan amounts

Secured vs unsecured loans

As unsecured loans aren’t tied to an asset, the risk to lenders is higher, so these often come with a higher rate of interest when compared to secured loans. While some lenders specialise in unsecured loans for bad credit, you will usually need a fair to good credit score to be eligible for an unsecured loan from a high street lender. Secured loans, on the other hand, are not as accessible as their unsecured counterparts as not everyone is able to provide collateral. This is either because they don’t have a property or vehicle in their name, or they don’t want to risk it by securing a loan against it.

Choosing which type of loan is right for you will depend entirely on your own situation and circumstances. Please seek independent financial advice before taking out any new form of credit.

Please note, none of these articles are intended to constitute financial advice and should be used for informational purposes only.