Unsecured loans explained  

Unsecured loans are a type of personal loan. With an unsecured loan, you borrow a fixed amount of money from a lender, with a specific time to repay it agreed at the start. You also agree to an interest rate, which affects how much your monthly repayments will be and how much you’ll pay back in total. You can typically borrow between £1,000 and £25,000 with an unsecured loan.  

If you have a good credit score and a history of responsible borrowing, you should be approved for an unsecured loan. Most importantly, you don’t need to put up an asset as security for an unsecured loan.  

Pros and cons of an unsecured loan  

Pros  

• Access to money: Once the lender approves your application, you will likely get the money within a few days.  
• Flexible repayments: You may be able to choose different options around the length of your loan, with terms often ranging from one to seven years. Remember, the longer the term, the more you’ll pay in interest.  
• Boost your credit score: Making your repayments in full and on time every month can help boost your credit score.  
• No collateral needed: An unsecured personal loan means you won’t lose your home if you miss your payments. However, defaulting on payments will affect your credit score.  

Cons  

• Higher interest rates: Typically, unsecured loans have higher interest rates than secured loans as they represent more of a risk to the lender.  
• Reliance on credit score: If you have a poor credit history, fewer lenders may consider you for an unsecured loan. It may also be more difficult to secure a low interest rate.  

Types of secured loans  

There are several types of secured loans, including:  

• Homeowner loans: A loan from your current mortgage lender against your home, often used for home improvements.  
• First mortgage: A loan from a mortgage lender to buy your home.  

• Second mortgage: A loan from a different mortgage lender, this uses the equity you have available in your home once you have removed the equity used by your existing mortgage provider. 
• Second mortgages are often used for home improvements or debt consolidation.  

Pros and cons of secured loans  

Pros  

• Access to money: You may be able to borrow more money through a secured loan than you would with an unsecured loan.  

• Application: It may be easier to get a secured loan if you have a poor credit score or are self-employed. 
• Availability: Some people take out secured loans because they need a larger sum of money and they cannot re-mortgage within an initial fixed mortgage period and would have to pay a penalty for changing this. 

Cons  

• Secured against an asset: As the loan is secured against your home or another asset, you may be at risk of losing this asset if you don’t keep up with your repayments.  
• Longer terms: As secured loans often have longer payment terms; you’ll pay more in interest over the longer term.  

• Variable interest rates: The interest rates of unsecured loans are often fixed, but secured loans sometimes have variable interest rates. This means your monthly payments may increase in the future.  

What’s the difference between secured and unsecured loans?  

The biggest difference between secured and unsecured loans is the security required for the loan. With unsecured loans, you don’t need to be a homeowner to apply or to put down an asset as a guarantee on the loan.  

You can generally borrow more and sometimes get a lower interest rate with a secured loan, as you’re putting down additional security for the lender which means they are willing to take on more risk. If you get into difficulty with your loan and can’t pay it back, the lender can seize your asset to cover its losses. This isn’t the case with unsecured loans. 

If you’re considering applying for a secured loan vs. an unsecured loan, consider your personal circumstances, your assets and your options should you get into financial difficulties in the future. 

Alternatives to getting a loan  

A loan isn’t the only option you have available.  

Borrowing from family and friends: You may be able to borrow from family or friends, depending on the relationship you have with them. There’s no need for credit checks and they may not charge you interest. If you decide to borrow from family or friends, consider drawing up a loan agreement to make sure everyone is on the same page from the start. You should also consider how borrowing and lending may impact your ongoing relationship.  

Credit card: If you need to make a one-off payment for something, a credit card may be a better option than a longer-term loan. Taking out a credit card and making monthly payments on time is also a good way to boost your credit score.  

Save up: It may take a while, but saving money every month rather than paying off a loan means you won’t go into debt.