There are many different borrowing options available, which can make choosing the right loan a hard decision. One of the main choices is whether to use a secured or unsecured loan, but what is the difference? In this blog, we will cover both borrowing options, helping you to understand which option may be right for you.
Basics of a secured loan
Secured loans allow you to borrow a certain amount of money for a set period. With this option, an asset is used as security. Usually, these are properties, but some lenders will accept other valuable items. To qualify, you must either own a home or have another valuable asset.
Using a property as security means if you consistently fail to make monthly payments, your house may be repossessed. Therefore, you need to carefully assess if this is the right option before applying.
Basics of an unsecured loan
Unsecured loans don't require any assets as security. In other words, you can borrow money from a lender without needing to secure it with any valuable possessions. Lenders rely on your credit score and your commitment to repay the loan. However, because there's no security, lenders see them as a greater risk. So, they may charge higher interest rates.
If you can't make payments, the lender can't take your property or another asset to recover their costs. Instead, they may take legal action, such as issuing a county court judgement. This can harm your credit score and make it harder to get finance in the future. Therefore, although your property may be safe, there are still risks involved with this option.
Key differences
The primary difference is that one uses an asset as security, whilst the other does not. However, there are a few other key differences that are worth noting.
Factor | Secured Loan | Unsecured Loan |
|---|---|---|
Security required | Yes (usually a property) | No |
Loan size | Typically higher ranges | Typically lower ranges |
Interest rates | Usually lower | Usually higher |
Repayment term | Longer (from 3 - 35 years) | Shorter (typically 1–10 years) |
Risk | Home may be at risk if payments are missed | Credit score could be damaged if payments are missed |
Which loan may be suitable for you?
The best loan for you depends on your own financial situation and what you need to borrow the money for. There is no single option that is right for everyone, as different loans suit different circumstances.
Your eligibility will also affect what you can choose. For example, secured loans usually require you to own a property or another asset that can be used as security. If you do not have anything to use as security, an unsecured loan may be more suitable.
You should also think about how much you want to borrow, how long you need to repay it, and what you can realistically afford each month. Before applying for any loan, it’s important to carefully check your income and expenses to make sure the repayments will be manageable.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
