Borrowing money can be a confusing business, especially with the multitude of different products on the market.
If you’re taking out a loan, chances are you’ll have had to choose between secured and unsecured products. There are some significant differences between the two, and it’s important to understand what these are before you apply.
If you’re looking to borrow a large amount, you will find that secured loans, or homeowner loans, which use your home as security, are often the cheapest option. Just make sure you carefully budget for your monthly repayments. Unlike unsecured personal loans, you could risk 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.
Understandably, banks are more willing to lend money to people who have an asset, such as a house, to offer as security. They will usually insist on this if you want to borrow a large sum – typically £25,000 or more.
What are the pros and cons of secured loans?
While a secured loan often offers more generous terms, it can put your personal assets at risk. Here are the benefits and consequences of taking out a secured loan:
- 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 easier to apply for.
- Longer terms – you can choose longer repayment periods for secured loans, and fixed monthly instalments should make it easier for you to budget. However, this can mean you pay more in interest in the long run.
- Higher risk - if you fail to keep up with your repayments and you default on the loan, you could lose your home.
How much can I borrow?
With a secured loan, you can typically borrow between £5,000 and £125,000 against your home. 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 in 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.
Unsecured loans are more suitable for smaller sums of money (up to £5,000 or so). However, if you’re looking to make repayments in a short space of time, you’ll find often find the interest is higher.
What are the pros and cons of unsecured loans?
Unsecured loans aren’t backed by your assets but do come with their own consequences if you can’t keep up with the repayments. Here are the positives and negatives of taking out an unsecured loan:
- Lower risk – unsecured loans can be an easy and affordable way to borrow without putting 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.
- High interest - Interest rates can increase significantly for smaller or larger sums, while the best deals are only available to people with the best credit scores.
How much can I borrow?
You can use an unsecured 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.
Find out more about our secured and unsecured loans.