Secured vs unsecured loans: which one’s right for you?
Unsure of exactly what a secured loan is and wonder how they differ from an unsecured loan? Well, the key difference is that a secured loan is secured on your property and an unsecured loan isn’t secured on anything. We take a deeper dive and explain everything in greater detail below.
Wanted: Secured Loan. Also goes by the name of…
At Loan.co.uk we aim to make getting a loan as straightforward as possible, but confusingly, secured loans are sometimes referred to as:
- Homeowner loans
- Home equity loans
- Second mortgages
- Second charge mortgages
- Debt consolidation loans (but not all debt consolidation loans are secured loans)
- First charge mortgages (but only if there’s no existing mortgage)
How does a second mortgage work?
A secured loan is money borrowed that uses collateral such as your home to secure the loan. The lender can be sure that you’ll make every effort to repay the loan, because they’re entitled to repossess your property if you don’t. That’s exactly why they’re called ‘secured loans’, because the lender has security in the form of your home.
To reflect that this is a less risky type of loan for the lender, the interest rates offered tend to be lower with a secured loan than with an unsecured loan.
Secured loans can be a good option if you want to borrow a relatively large sum. For example, at Loan.co.uk depending on your circumstances, you could borrow from £5,000 all the way up to £5 million.
What can a secured loan be secured upon?
Although homeowner loans are usually secured against a property, they may be secured on something other than a home, including your car, on jewellery or other assets that you own, such as a valuable painting or land.
When is a secured loan particularly useful?
Secured loans are often used if you’re looking to pay for some major home improvements or are useful if you were wondering how to get a second mortgage to buy a second house. If you were considering remortgaging, but then realised that a hefty Early Repayment Charge (ERC) would apply, a second mortgage might work out as the best solution. If you suffer from bad credit, or are self-employed, a secured loan offers lenders collateral against the loan. Therefore, your application is more likely to be accepted.
The difference between first and second charge mortgages
First charge mortgages are usually taken out to fund home improvements when you have no outstanding mortgage balance. A second charge mortgage is set up if you already have an existing mortgage (either with your current lender or a different lender) but you need to secure another loan against your property.
The advantages of a secured loan
Secured loans are a popular option because they can:
Offer a competitive interest rate. They often come with a lower interest rate than with a personal loan because the loan is secured against your home.
Help you budget. Your repayments are usually made on a monthly basis. If the interest rate is fixed then the repayment amount is also fixed, so you’ll know exactly how much to budget for. But note that if you opt for a variable rate, the amount you pay each month will vary.
May be easier to be approved for. If you have a poor credit score or credit history, or are self-employed, it can be awkward getting accepted for a loan. A secured loan using your property as collateral can give lenders the confidence to lend you the money you need.
The disadvantages of a secured loan
You risk losing your property. You have to ensure you can keep up with repayments, otherwise your home can be repossessed.
Fees will apply. We recommend you review the terms of your new loan for any fees or early repayment penalties as they can increase the cost of borrowing.
How to get a second mortgage?
You’re already in the right place as Loan.co.uk can help you find the right secured loan for you. Just visit our Homeowner loans page. You may also find it useful to approach your current mortgage provider to see if they can offer you a second mortgage, but remember to ‘shop around’.
What’s an unsecured loan?
Exactly as it sounds, an unsecured loan isn’t secured on anything. You simply borrow money from a lender, agreeing to make regular payments until the loan is fully repaid.
Because an unsecured loan, often known as a personal loan doesn’t use collateral, the interest rate offered will usually be higher than with a secured loan, but the amount you’ll be offered will generally be lower. For example, personal, unsecured loans at Loan.co.uk start at £1,000 and go up to £35,000.
What are the pros and cons of an unsecured loan?
Because you can take out an unsecured loan without using your property as collateral, many people believe that they’re the ideal type of loan. But as with most things, there are pros and cons.
The pros of an unsecured loan include:
- There’s no risk to your home. Your home or other assets will not be at stake if things go wrong.
- They’re available to tenants as well as homeowners. Because the loan isn’t secured against property, anyone can apply for an unsecured loan, even if they don’t have anything they could use as collateral.
- They’re quick and easy to arrange. With no property to value and without having to work out how much equity is available, a personal loan can be arranged and paid out rapidly, sometimes within as little as a day of the application being approved.
- They make it easy to budget. Because personal loans usually have a fixed rate of interest and a fixed term (set amount of monthly repayments) you’ll know exactly where you stand with your budget.
The cons of an unsecured loan include:
- The maximum loan amount is usually less than with a secured loan. If you require a very large injection of cash, at Loan.co.uk you can apply for a personal loan from £100 to £35,000. But with a secured loan, you could borrow from £5,000 to £5 million, depending on the equity you have in your property.
- The interest rate is likely to be higher than with a secured loan. Without collateral to back the loan, there’s more of a risk for the lender, and if there’s more risk, the interest is likely to be higher. As with most loans, if you have a poor credit rating, the interest rate you’ll pay will be relatively high and if you have a good credit rating, you’re likely to be offered a low interest rate.
Are there any alternatives to secured and unsecured loans?
If neither a secured loan or an unsecured loan is quite right for you, there are alternatives that you could consider, such as:
With a guarantor loan, a second person (usually a close friend or relative) agrees to personally cover your repayments on the loan if you become unable to keep up with them. Because of this, you’re much more likely to be approved than with either an unsecured loan or secured loan. But, the guarantor has to pass the same credit checks as you and of course, they may not be particularly pleased if they have to bail you out.
Credit cards. Although the interest rate you’ll be offered with a credit card tends to be higher than with a secured or unsecured loan, they offer a flexible line of credit. You can spend up to your credit limit (this may affect your credit score) and repay anything from an agreed minimum monthly amount right up to the balance. Credit cards can also come with a variety of features, from cashback on spending to travel rewards. You may even find a card offering 0% interest for a limited amount of time.
Although these don’t usually offer credit, a prepaid card could help you build your credit rating and that may help you to be approved for a loan in the future.