Secured vs Unsecured Loans

When borrowing money in the UK, you’ll often come across two main types of loans: secured and unsecured. Understanding the difference between the two is essential for choosing the right option based on your financial situation, borrowing goals, and risk tolerance. This guide explains how each loan type works, how they compare, and which might suit you best.

What Is a Secured Loan?

A secured loan is a type of credit that is backed by an asset, typically your home. Because the loan is secured against your property, the lender has the right to repossess that asset if you fail to repay. These loans are often referred to as homeowner loans or second charge mortgages in the UK.

Secured loans are generally used for borrowing larger sums over longer periods — typically ranging from £10,000 to £500,000 and repayable over 3 to 25 years. They can offer lower interest rates than unsecured options because the lender’s risk is reduced by the security you provide.

What Is an Unsecured Loan?

An unsecured loan, often called a personal loan, is not tied to any asset. The lender makes their decision based primarily on your credit score, income, and affordability. If you fail to repay, the lender cannot take your home or other property, but you could still face legal action, and your credit score will likely be negatively impacted.

Unsecured loans tend to have lower borrowing limits — typically up to £25,000 — and shorter repayment terms, usually from 1 to 7 years. Interest rates can vary widely depending on your credit profile.

Key Differences Between Secured and Unsecured Loans

1. Collateral

  • Secured loan: Requires collateral (usually your home)
  • Unsecured loan: No collateral required

2. Loan Amount

  • Secured loan: Higher borrowing limits, typically £10,000 to £500,000
  • Unsecured loan: Lower limits, often capped at £25,000

3. Interest Rates

  • Secured loan: Often lower, especially for those with good equity and credit
  • Unsecured loan: Can be higher, especially for those with poor credit

4. Repayment Terms

  • Secured loan: Longer terms available, up to 25 years
  • Unsecured loan: Shorter terms, usually 1 to 7 years

5. Approval Criteria

  • Secured loan: Based on property equity, income, and affordability
  • Unsecured loan: Primarily based on credit score and income

6. Risk to Borrower

  • Secured loan: Risk of losing your home if you fail to repay
  • Unsecured loan: No asset is at risk, but your credit rating can suffer

Pros and Cons

Secured Loans

Pros:

  • Lower interest rates
  • Higher borrowing limits
  • Longer repayment terms
  • May be available to those with bad credit

Cons:

  • Risk of losing your home
  • Longer application process
  • May include valuation and legal fees

Unsecured Loans

Pros:

  • No risk to your property
  • Faster application and funding
  • Simpler documentation

Cons:

  • Higher interest rates
  • Lower borrowing limits
  • Harder to get with bad credit

Which Is Right for You?

The right type of loan depends on your personal circumstances.

A secured loan may be suitable if you:

  • Own a home with equity
  • Need to borrow a large amount
  • Want a longer repayment term
  • Have been declined for unsecured loans due to bad credit

An unsecured loan may be better if you:

  • Only need to borrow a small to medium amount
  • Have a strong credit history
  • Prefer not to risk your home
  • Want quicker access to funds

FCA Regulation and Borrower Protection

Both secured and unsecured loans are regulated by the Financial Conduct Authority (FCA) in the UK. Lenders are required to carry out affordability checks, present clear loan terms, and ensure fair treatment. If you feel a lender has acted unfairly, you can escalate your complaint to the Financial Ombudsman Service.

FAQs

Is a secured loan easier to get than an unsecured loan?

It can be, particularly for those with bad credit, since the lender has security in place. However, the application process for secured loans is usually longer.

Will a secured loan affect my mortgage?

No. A secured loan is typically a second charge loan and sits behind your main mortgage. It does not change your current mortgage terms.

What happens if I default on a secured loan?

The lender could take legal steps to repossess your home in order to recover the money owed. This is why affordability is critical.

Can I switch from an unsecured to a secured loan?

You can’t convert an existing loan, but you may choose to take out a secured loan to repay unsecured debts — often as part of a debt consolidation plan.

Are both types of loans reported to credit agencies?

Yes. Your repayment history for both secured and unsecured loans will appear on your credit report and can impact your score positively or negatively depending on your behaviour.