Secured vs Unsecured Loans

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ABC FinanceSecured loansSecured Vs Unsecured Loans
Gary Hemming

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in secured loans

If you’re seeking a loan to finance a significant purchase, you’ll likely have plenty of options. Arguably, the most significant consideration is whether you should take out a secured or unsecured loan. We will discuss the benefits and drawbacks of both approaches throughout this guide.

What is a secured loan?

A secured loan is simply a type of loan with is secured against some form of collateral. Examples of an asset that you could use to take out a secured loan include:

  • Property in your name – you can borrow against any equity in the property
  • Cars or other vehicles, if you own them outright and they hold sufficient value
  • Personal possessions, such as jewellery or works of art. These will need to be independently valued, and you’ll need to provide evidence of your ownership

By taking out a secured loan, you allow the lender to take a charge over the equity held in the asset.

Secured loans are popular because they allow you to borrow more than an unsecured loan, offer lower interest rates than their unsecured counterparts, and are easier to qualify for.

What is an unsecured loan?

An unsecured loan is a sum of money you borrow that is not attached to any external possession. By taking out an unsecured loan, you enter into a contract with a creditor to make any repayments on time and without fail.

Most of the risks attached to an unsecured loan fall on the shoulders of the lender. Due to these risks, an unsecured loan will typically be more difficult to qualify for than secured borrowing.

In addition, the interest rate will be higher to account for the increased risk, and the repayment term will be shorter, leading to higher monthly repayments. You will also not be able to borrow as much as you could with a secured loan. For more, check out our secured loan comparison page.

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How much can you borrow with a secured vs unsecured loan?

As unsecured loans are riskier by their very nature, lenders will typically place a cap on how much they are willing offer. Most personal loan lenders will not offer more than £25,000 without collateral.

A secure loan allows you to borrow more. Some lenders are even willing to offer secured loans for six-figure sums. Naturally, though, the sum that you can borrow will depend on the value of the asset you use to secure the lending.

Secured loans are usually offered for up to 90% of the value of your asset, known as loan to value (LTV).

Repaying a secured and unsecured loan

Once you have agreed upon a contract with your lender, you will be expected to make monthly repayments. These will typically be made by direct debit.

How much you need to pay each month will depend upon the interest rate you take out and the length of the loan term. Imagine that you have taken out a loan for £25,000. The average repayments will be as follows.

 Interest rate
Loan term3%5%7%10%13%
5 years£450£470£490£525£560
8 years£290£315£340£375£410
10 years£250£265£287£325£362
15 years£170£200£220£260£305
20 years£140£165£190£235£280
25 years£120£145£173£220£270

If taking out a loan, you will need to decide what you value more – lower repayments in the short-term or a smaller total figure repayable.

Our £25,000 loan at an interest rate of 7% would lead to a total repayable figure of £32,464 over 8 years, meaning it would cost you a total of £7,464 in interest. The total amount repayable rises to £39,908 over 15 years, meaning it would cost £14,908 altogether.

In theory, you will be able to pay off your secured or unsecured loan early. Discuss your options with your lender if you wish to repay your loan before the end of the term.

What happens if you don’t repay your loan?

The risks of taking out a secured loan could not be clearer. If you fail to maintain repayments on a monthly basis, your asset is at risk. In some cases, the lender can lay claim to the asset in its entirety.

The repercussions are potentially less catastrophic if you fail to make payments on an unsecured loan. The lender has no direct charge over any of your assets. They can sell your debt to a third-party debt recovery company, but these companies only have the power to ask (politely or otherwise!) for repayment.

A debt recovery company will typically call and write to you with increasing urgency and may even knock on your door, but you are not legally obligated to interact with them. A debt recovery company cannot enlist the services of enforcement agents (aka bailiffs) to seize your possessions to counter the debt unless you have an outstanding CCJ.

This does not mean there are no repercussions to failing to repay an unsecured loan. If you default on an unsecured loan, your credit score will take a hit that lasts six years. This will make it difficult to obtain credit in the future.

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Critical differences between secured and unsecured loans

We have discussed the fundamental differences between secured and unsecured loans throughout this guide, but let’s summarise the two approaches. This way, you can choose the ideal solution for your needs at a glance.

 Secured LoansUnsecured Loans
Maximum loan amountUp to 90% of the value of the asset you secure againstUsually around £25,000
Average interest rate2 – 10%, depending on the lender and your finances6 – 25%, though a less-than-stellar credit history may lead to a higher rate
Fixed or variable interest?Often variableTypically fixed
Average repayment term5 – 25 years1 – 10 years
Length of time to arrangeAround 1 – 3 weeksTypically 1-3 days
Where to findA secured loan broker is the simplest way to find the best dealHigh street banks or online lenders – shop around for the best interest rate
Any additional fees?You’ll pay for valuations of your asset and any administrative fees, as well as paying for the services of a secured loan brokerThe lender may charge a set-up fee and this to the total repayable – check the small print of the contract
Available with bad credit?Yes, within reason. Active mortgage arrears, IVAs or bankruptcy may still be an issue. These are known as bad credit secured loans.Unlikely – if you do get an offer, expect to pay more interest
Repercussions for failing to make paymentsRepossession of the asset you secured the loan against, and defaults on your credit reportDefaults on your credit report and the possibility of debt being sold to a third-party collector
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Should I get a secured or unsecured loan?

When it comes to secured vs unsecured loans is the best option for you is summarised in the table below:

Secured loans are best for…Unsecured loans are best for…
Loan needs above £25,000, to be repaid over a prolonged periodSmaller loans below £25,000 that can be repaid in around five years
Anybody with assets that is confident they can make the monthly repayments – the interest rate on this loan will be lower and fixed rate secured loans are available.Borrowers that do not own their own home, or any asset of similar value, to put up as collateral for a loan
Borrowers with a questionable credit history. Secured loans typically come with more forgivenessBorrowers with a clean credit history – the higher your credit score, the better your interest rate
Borrowers with access to the expertise and experience of a financial adviserAnybody seeking a loan through a high street or traditional online lender
Borrowers with plenty of time to wait for asset valuationBorrowers that need a fast turnaround – most unsecured loans pay out in 24 hours

Weigh up the benefits and drawbacks of each approach and decide which is best for your unique circumstances.

What are the alternatives to secured and unsecured loans?

If neither a secured nor unsecured loan appeals to you, you have three primary alternatives to gaining access to funding. Decide if these will serve your needs better than a loan.

0% credit card

You’ll likely find multiple credit card companies vying for your business if you have an impressive credit score. In an attempt to win you over, these cards will come with a range of special offers and deals – including 0% interest on purchases for a set period.

This can work out cheaper than taking out a loan … ifyou settle the balance in full before the card starts charging interest and ifyou are awarded a credit limit sufficient for your needs. You could take out multiple cards at once to increase your lines of credit, but remember that every hard search from a lender will impact your credit report.

Remortgaging a home

In many respects, remortgaging a home is similar to securing a loan against a property. You can approach your existing mortgage lender and ask to borrow more money, adding this to the total sum you owe.

Most mortgage lenders will allow you to borrow up to 90% of your property value, including the repayments you already have outstanding.

This means selling a greater stake of your home back to your mortgage lender, increasing the risk of losing your home if you cannot maintain repayments. However, one advantage of remortgaging is that, as a proven quantity to the lender, you may be offered a preferential interest rate – assuming you have always made your monthly repayments.

Equity release

Equity release on a property is a controversial approach, but it is increasingly popular. Open to homeowners over the age of 55, this is also known as a lifetime mortgage.

Equity release involves selling all or part of your home to a third party in exchange for a lump sum which can be used as you see fit. This sum is then repayable when you sell your home or pass away.

The advantage of equity release is that you’ll receive the funds that you require, with no need to factor monthly repayments into your budget.

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