Secured vs unsecured loans: what’s the difference?

Secured and unsecured loans at a glance

Individual offers vary. Compare the documents for the borrowing available to you, rather than treating either category as having one standard price or set of terms.^{2, 3, 4}

How does each type of loan work?

A secured homeowner loan

If you already have a mortgage, additional borrowing secured against the same home is usually a second charge mortgage. It is a separate agreement with its own repayments. Your existing mortgage continues, so your budget must cover both commitments.⁵

The property provides security for the lender if you fail to repay. “Secured” describes that protection for the lender. It does not mean that borrowing is safe for you or that an application will be accepted.

An unsecured personal loan

You borrow a lump sum and repay it over an agreed period. Payments commonly include interest and part of the amount borrowed. With a fixed rate loan, the agreed repayment is normally the same each month.⁶

You can own a home and still choose unsecured borrowing. Using a personal loan for a kitchen, bathroom or other home improvement does not by itself make the loan secured against the property. The agreement determines whether the lender takes security.^{1, 6}

How do lenders decide whether you qualify?

Both types of borrowing involve checks on your ability to repay. Lenders consider your financial circumstances and credit history, using assessments appropriate to the loan. An unsecured loan still requires a creditworthiness assessment.⁷

For borrowing secured against your home, the lender also considers the property value and existing secured debt. Equity is the value left after deducting borrowing already secured against the property. Having equity does not establish that you can afford another monthly payment. Mortgage affordability rules require the lender to assess income, expenditure and relevant future changes.^{5, 8}

Ask whether an initial eligibility check uses a soft credit search. A soft search does not affect your credit score. A hard search can appear on your credit report and affect future lending decisions. The lender's assessment may influence both acceptance and the rate offered.⁹

Is a secured loan cheaper than an unsecured loan?

There is no single answer. The cost depends on the offer, the amount borrowed, the repayment period and the fees. A lower advertised rate is not enough to establish that one loan will cost less.¹⁰

Compare the same amount of usable money

Start with the amount you actually need to receive. If fees are added to the balance, you owe more than the cash available for your purpose. If fees are deducted from the advance, you receive less than the stated borrowing amount. Ask the lender or broker to make this clear.³

For a fair comparison, record the following for each offer:

1. The amount you will receive.
2. Any fees paid separately or included in the borrowing.
3. The monthly repayment and repayment term.
4. Whether the interest rate can change.
5. The total amount payable under the stated assumptions.
6. Any cost of repaying early.^{3, 10}

Understand APR and APRC

Personal loans are commonly compared using the annual percentage rate, or APR. It includes interest and relevant charges. A representative APR is an advertising comparison figure, not a promise that you will receive that rate. Check the personalised offer.^{11, 12}

Mortgage borrowing uses the annual percentage rate of charge, or APRC. This reflects interest and relevant charges over the full mortgage term using prescribed assumptions. It cannot predict future variable rates. Compare it alongside the payment schedule and total amount payable.¹³

Look beyond the monthly repayment

A longer repayment period can reduce the monthly payment while increasing total interest. If a fee is financed as part of a mortgage loan, you will normally pay interest on that fee too.^{2, 14}

If you expect to clear the borrowing early, ask for a comparison over that period. Include payments made, the balance needed to settle and any settlement charges or separately paid fees. Counting only the monthly payments would leave out the debt still outstanding. Avoid counting the same fee twice.

What happens if you miss repayments?

With either loan, missed payments can damage your credit record and may lead to extra charges and debt recovery action. Contact the lender as soon as you think a payment will be difficult.^{4, 10}

For a homeowner secured loan, your property is directly at risk. Falling behind on a second charge mortgage can lead to repossession even if you continue paying your original mortgage.¹⁵

An unsecured loan does not give the lender a charge over your home when you take it out. However, that does not mean property can never become involved in enforcement.

In England and Wales, a creditor that obtains a court judgment may apply for a charging order against property you own. This is a separate legal process. A charging order does not itself force an immediate sale, although the creditor may subsequently apply for an order for sale.¹⁶

The practical distinction is when and how the lender obtains security. Unsecured borrowing still creates a debt that the lender can pursue.

What if you want to consolidate other debts?

Debt consolidation means using new borrowing to repay existing debts. It can change the interest, payment schedule and total cost of what you owe.¹⁷

Using a homeowner loan to repay unsecured credit cards or personal loans changes the security position too. The replacement debt is secured against your property.

Think carefully before securing other debts against your home.

Compare the cost of keeping the existing debts with the complete cost of the new loan, including fees and the repayment term. A lower combined monthly payment can result from spreading the debt over more years, which may increase the total amount repaid. Continuing to borrow on cleared cards can leave you with both the consolidation loan and new card balances.¹⁷

If you are borrowing to cover essential bills or cannot maintain existing repayments, seek free debt advice before taking on another loan. MoneyHelper provides access to free debt advice services.¹⁸

How should you compare your options?

Begin with the expense and your budget. Establish how much you need, whether the purchase can wait and what repayment you can maintain after essential bills. Consider how that budget would cope with higher household costs or a reduction in income.¹⁸

Then compare suitable borrowing over a realistic repayment period. Ask yourself:

1. Does the available loan cover the actual expense without unnecessary extra borrowing?
2. What is the total cost, including fees?
3. Am I comfortable granting security over my home?
4. Could a variable rate or the end of a fixed period change the payment?
5. What would it cost to settle early if my plans changed?

Homeowners may also be able to consider a further advance from their existing mortgage lender or remortgaging with additional borrowing. These involve their own costs and suitability questions. A further advance can have a different rate from the original mortgage. Remortgaging can change the rate on the existing balance as well as the extra borrowing.¹⁹

Common questions

Can I get an unsecured loan if I have a mortgage?

Potentially. Having a mortgage does not require you to secure new borrowing against your home. The lender will assess your existing commitments and whether you meet its criteria.^{1, 7}

Does giving a lender my address make a loan secured?

No. Supplying an address or stating that you own your home does not itself grant security. Check the agreement to understand the lender's rights and your obligations. The separate possibility of court enforcement still applies.^{1, 16}

Can I repay either type of loan early?

Early repayment is generally possible, but charges or settlement interest may apply. Ask for a settlement figure for the date you intend to repay and check the agreement's overpayment terms. Do not assume that an unsecured loan is free to settle early.^{4, 14}

Should I apply for a secured loan after being refused an unsecured loan?

Not automatically. First try to understand the refusal and check your credit report for errors. Making several applications in a short period can make further borrowing harder. Offering property as security does not resolve an affordability problem.^{20, 8}

Exploring secured borrowing through Habitat Loans

If you explore secured borrowing through Habitat Loans, ask the broker for a personalised mortgage illustration and an explanation of the recommended option. Check who provides the mortgage advice, which lenders they consider and any fees before committing.³

The comparison should leave you clear about the monthly commitment, total cost, alternatives and risk to your home. You should understand why the proposed borrowing fits your circumstances before deciding whether to proceed.