Secured loans vs unsecured loans: Explained

Think carefully before securing other debts against your property.

Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

Key takeaways

•Secured loans are secured against an asset, such as a home or car, and the lender has the right to repossess it if payments are not made. They typically have lower interest rates than unsecured loans but come with set-up costs.

• Unsecured loans do not require any collateral and so pose less risk for the borrower; however, they usually have higher interest rates than secured loans due to their lack of security. There may also be no set-up fees associated with them but borrowing potential is generally lower and loan terms shorter.

Which loan is better: secured or unsecured?

The answer depends entirely on the borrower's individual needs and financial situation. When weighing up the pros and cons of both secured and unsecured loans, you should assess seven core criteria:

  1. Interest rates: how much interest you’ll be expected to pay back each month on top of your loan amount. 

  2. Risk level: the loan type which poses the greatest risk to you as the borrower. 

  3. Borrowing potential: the value of the loan. 

  4. Loan term: the length of time you have to repay the loan

  5. Time to approval: how long it takes to approve the loan

  6. Set-up costs: how much the fees are to set up the loan agreement

  7. Monthly repayments: the amount you have to pay back each month

  8. Use of an asset: whether or not you need collateral

The table below outlines the comparisons between both loan types against these seven criteria.

Examples of secured loans

  • Credit cards

  • Personal loans

  • Student loans

  • Overdrafts

Unsecured loans are loans that do not require any collateral. This type of loan is much riskier for the lender, as there is no asset to back up the loan should the borrower default.

Pros of secured loans vs unsecured

Interest Rates

Expect to pay potentially lower interest rates than you would for an unsecured loan

Loan Amount

Expect to secure a larger loan amount than you would for an unsecured loan.

Term Length

Expect a longer loan term than you would for an unsecured loan.

Interest-only

Expect to pay less in monthly repayments than you would for an unsecured loan thanks to interest-only secured loans.

Cons of secured loans vs unsecured

Greater Risk

Secured loans pose a greater risk than unsecured loans as you secure the loan using a valuable asset, e.g. your home

Set up costs

Expect to pay set-up costs when applying for a secured loan

Approval time

It can take longer to approve your secured loan

Examples of unsecured loans

  • Credit cards

  • Personal loans

  • Student loans

  • Overdrafts

Unsecured loans are loans that do not require any collateral. This type of loan is much riskier for the lender, as there is no asset to back up the loan should the borrower default.

Pros of unsecured loans vs secured

Set up costs

There are usually no set-up costs for unsecured loans.

Approval time

It generally takes less time to approve an unsecured loan than a secured loan.

No collateral

You don’t need to put up an asset as collateral.

Cons of unsecured loans vs secured

Interest rates

Interest rates are usually (although not guaranteed) higher than secured loans as the loan is generally granted based on creditworthiness, income and debt-to-income ratio.

Borrowing potential

Your borrowing potential won’t be as high as it would be with a secured loan.

Loan terms

Unsecured loan terms are usually shorter than a secured loan.

 
 
 
 
 
 

Lending Criteria

Minimum and maximum ages

Applicants must be over 18, with the maximum term finishing before they turn 80-85 depending on the lender

Minimum occupancy

No minimum occupancy requirement with most lenders

Low incomes

There is no minimum income requirement with most lenders

Smaller property values

No minimum property value requirement with most lenders

What people are saying about Better.co.uk...

 
 
 
 
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You may have to pay an early repayment charge to your existing lender if you remortgage. Your savings will depend on personal circumstances.

Your home may be repossessed if you do not keep up repayments on your mortgage.

*The savings figure of £656 is based on Better.co.uk remortgage customers in April 2024. Read more on our marketing claims page.

We can't always guarantee we will be able to help you with your mortgage application depending on your credit history and circumstances.

Average mortgage decision and approval times are based on Better.co.uk's historic data for lenders we submit applications to.

Tracker rates are identified after comparing over 12,000 mortgage products from over 100 mortgage lenders.

As of January 2023, Better.co.uk has access to over 100 lenders. This number is subject to change.

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