What are secured and unsecured loans?
Finding the best loan is not just about getting the cheapest rate, you need to pick between a secured and unsecured loan too. Here is how they work and how to choose the right one.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
What is a secured loan?
It is a cash loan that is tied to an asset that you own. If you are unable to pay back your loan the lender can repossess the asset, and sell it to get their money back.
Most lenders use property as their security, but some will let you use other items like your car or other valuables.
Secured loans tend to be for larger sums or to buy specific items, like vehicles or property. They set a maximum loan to value (LTV) percentage.
What is a LTV ratio?
The loan to value ratio is the size of a loan compared to the value of a property expressed as a percentage.
For example, if you owned a property outright worth £200,000 and the maximum LTV was 75%, the most you could borrow would be £150,000.
While this sets an upper limit, how much you can borrow is still based on what you can afford and your credit record.
Pros and cons
Pros:
Can borrow larger sums
Can borrow with poor credit
Offer longer terms
Cons:
Puts your property at risk
LTV limits what you can borrow
Rates may be variable
Types of secured loan
Homeowner: These loans are secured against your property and are normally for larger sums over £25,000. They can last for anywhere from 3 to 35 years.
Logbook: These loans are secured against your vehicle and the money you borrow can be used for any purpose.
Vehicle finance: These loans are secured against the vehicle you buy using a finance agreement. Once you have paid off the finance agreement you will own the vehicle.
Bridging: These loans are secured against your property and are normally large loans to bridge the gap between other finance being agreed.
Some debt consolidation: These loans can be secured against your property, and sometimes other assets, to pay off existing debts.
What is an unsecured loan?
It is a cash loan where you do not need to add anything as security; you just borrow money from the lender as a lump sump and pay it back over an agreed amount of time.
You could borrow up to £25,000 with an unsecured loan, sometimes more, and they tend to last between one and seven years.
How much an unsecured loan will cost depends on how risky the lender considers you to be, some of the things they look at include:
How much you want to borrow
How long you want to borrow for
Your credit record
Your income
Pros and cons
Pros:
No risk to your property
More flexible
Quicker to apply
Cons:
Need good credit for best rates
Sometimes more expensive
Loans tend to be smaller
Types of unsecured loan
Personal: These loans let you to borrow a cash lump sum and pay the money back over an agreed amount of time.
Guarantor: These loans allow you to borrow money with the help of a friend or family member.
Peer to peer: These loans allow you to borrow money from other people online, in exchange they earn a return on their money from the interest you pay.
Some debt consolidation: These loans can be used to pay off your existing debts to make them easier to manage and cheaper to pay back.
What are the risks?
Both types of loan share some of the same risks, including:
Taking on borrowing you cannot afford
Damage to your credit record
Fees if you are late paying or miss a payment
Being taken to court if you default
Secured loans also put your belongings at risk, because the lender can repossess whatever you have chosen to list as security on the loan if you cannot pay it back.
What happens if you cannot pay your debts?
Should I choose a secured or unsecured loan?
If there are two identical loans but one is secured and the other unsecured, you should pick the unsecured loan.
You should only choose a secured loan over an unsecured loan if:
It is much cheaper than the unsecured alternative
You need to borrow over a longer term, over 10 years
You need to borrow a large amount, over £25,000
This is because the secured loan has a claim on your property so it puts it at greater risk if something were to go wrong.
Secured vs unsecured loans FAQs
No, you will need to apply for two separate loans if you decide to do this.
Unsecured loans tend to be quicker because the lender does not need to check the value of your security when you apply.
Yes, you can get a joint loan for both. If you apply for a secured loan with someone else they will need to also own the property you use as security.
Need a loan? Compare loan lenders side by side to find one that is cheap to pay back, lets you borrow what you need and has repayments you can afford.