There are some significant differences between secured and unsecured loans, and you should consider them carefully before making an application.
If you’re looking to borrow over £25,000 you will find that secured loans, or homeowner loans, which uses your home as security are often the cheapest option. Just make sure you carefully budget for your monthly repayments with a secured loan calculator. This is because unlike unsecured personal loans, you could be at risk of losing your home if you miss payments on a secured loan.
What is a secured loan?
Secured loans, also known as home equity or homeowner loans, are loans that are backed using the capital that has accumulated in your property. This means you can only apply for this type of loan if you own your own home.
How much can I borrow?
With a secured loan you can typically borrow anything from £5,000 to £125,000 against your home – potentially even more if you remortgage as a way to release capital. But bear in mind that how much you can borrow, the term and the rate of interest will all depend on your personal circumstances and the amount of equity you have built up in your home.
What are the pros and cons of secured loans?
- Larger amounts – you can borrow much more with secured loans than with personal loans, which usually don’t go above £25,000.
- Lower rates – secured loans often have more competitive rates than unsecured loans because they represent a lower risk to the lender as they are secured against your property.
- Accessibility – if you are a higher risk customer, for example if you are self-employed, have County Court Judgements (CCJs), defaults or a bad credit history, you may find a secured loan is much easier to apply for. In fact most, if not all, bad credit loans are secured rather than personal loans.
- Longer terms – you can choose longer repayment periods for secured loans, and fixed monthly instalments should make it easier for you to budget. This is especially important because missing payments on a secured loan could result in you losing your home.
What is an unsecured loan?
Unsecured loans, also known as personal loans, do not require any security and are available to anyone with a reasonable credit history. They are available from most banks and other lenders, including peer-to-peer lenders that enable you to borrow from other individuals.
How much can I borrow?
You can use a personal loan to borrow anything from £1,000 to £25,000. However, you can usually get the most competitive deals for sums between £7,500 and £15,000. As ever, the amount you can borrow and the rate you pay will depend on your personal circumstances.
What are the pros and cons of unsecured loans?
- Low risk – unsecured loans can be an easy and affordable way to borrow and don’t put your property at risk.
- Flexibility – most lenders offer you a choice of fixed payments over one to five years, and some may offer a payment holiday of one to three months at the start of your agreement.
- Wide variation in rates – the best deals are often for loans over three or five years, meaning you will pay over the odds for a shorter term loan. Interest rates can also increase significantly for smaller or larger sums, while the best deals are only available to people with the best credit scores.