Secured vs unsecured personal loans: what’s the difference?

Secured vs unsecured loans overview 

This quick overview compares the two options side by side, highlighting the key differences. It’s a good place to start before exploring how each loan works in more detail and what it could mean for your finances.

What is a secured personal loan?

A secured personal loan is linked to an asset you own. The asset acts as security for the lender in the unlikely case where you can’t repay what you owe. 

In simple terms, if you stop making repayments and can’t make them over a prolonged period, the lender may have the right to take and sell your assets to recover the money. This doesn’t usually happen immediately, but it’s a risk you need to consider before taking out this sort of loan.

Types of secured borrowing

Common examples of secured loans you may take out include:

• Mortgages: Used to buy a home, with the property acting as security
• Homeowner or second-charge loans: Borrowing against the equity in a home you already own
• Car finance: Some car finance agreements are secured against the vehicle, meaning it can be repossessed if payments are missed

Remember that each type of secured loan has different rules, risks and protections. Always read the agreement carefully and make sure you understand what’s being used as security before you make the commitment.

Pros and cons of secured personal loans

Before taking out a secured loan, it’s important to understand both the benefits and potential downsides. Reviewing the pros and cons side by side can help you weigh up whether this type of borrowing suits your financial situation and long-term goals. 

As this type of loan is tied to an asset like your home or car, it has more risk and you could lose that asset if you can’t keep up the repayments. Taking the time to weigh these factors carefully can help you make a more informed decision and avoid unnecessary financial stress.

What is an unsecured personal loan?

An unsecured personal loan lets you borrow without something you own being used as security. Approval of the loan is usually based on your income, credit history and ability to repay. 

This type of loan carries less financial risk, as the lender can’t automatically take an asset if you miss repayments. But you’re still legally required to repay what you owe. If you don’t the lender may take legal action. It will also affect your credit score. 

Types of unsecured borrowing

Common examples of unsecured loans you may take out include:

• Credit cards: A flexible credit limit that you can borrow from as needed
• Pay now, play later (BNPL): Paying for purchases in instalments without upfront payment
• Overdrafts: Short term borrowing through your bank account
• Student loans: Government or private loans to help cover education costs

Remember that each type of unsecured loan will have different rules, criteria and risks. Always read the agreement carefully and get any questions answered from your lender so you’re confident with your decision.

Pros and cons of unsecured personal loans

Before choosing an unsecured personal loan, it’s important to clearly understand both the positives and potential drawbacks. Reviewing these side by side can help you decide whether this type of loan feels manageable and right for your circumstances. 

Unsecured loans can appear as the better choice as they aren’t tied to an asset, but if you can’t keep up the repayments, your credit score can be impacted. Taking a little time to consider these points can help you judge whether an unsecured loan fits your budget and financial goals.

How lenders decide whether to offer a loan 

When you apply for a loan, lenders look at a range of factors to decide whether to lend you money and what terms they can offer you. 

These often include: 

• Your income 
• Your affordability to meet the repayments 
• Your regular outgoings such as bills, rent or mortgage payments and existing credit 
• Your credit history to establish how you’ve managed borrowing in the past 
• Any assets used as security (This applies only to secured loans)

Lenders use this information to assess risk and affordability in your application. Understanding this can help you make a smarter decision on what feels realistic before you apply. The main thing is being able to show you can afford to pay back the money you borrow.

Which type of loan might suit you? 

A secured loan might suit you if: 

• You need to borrow a larger amount 
• You’re comfortable using an asset as security 
• You want to spread repayments over a longer period 
• You’re confident you can repay over the full term 

An unsecured loan might suit you if: 

• You don’t want to put an asset at risk 
• You’re borrowing a smaller amount 
• You prefer a simpler application 
• You want a shorter repayment period 

If you’re unsure, comparing options side by side and thinking about how secure your income is can help you choose wisely.

Costs to compare before you decide

Before choosing between a secured or unsecured loan, it’s important to look beyond the monthly repayment and consider the full overall cost involved. Taking time to compare these things can help avoid unexpected costs later down the line. 

Things to check include:

• Total amount repaid: Lower monthly repayments over a longer term often mean paying more overall
• Fixed or variable interest rates: Fixed rates stay the same, while variable rates can rise or fall during the loan term
• Fees and charges: Some loans include arrangement fees or other charges that affect the total cost
• Early repayment terms: Check whether you can repay your loan early and if charges may apply

What happens if you miss loan repayments?

This is a common concern many people have when borrowing money. It’s important to understand the potential consequences and risks associated with each type of loan. 

Missing repayments on secured loans

If you have a secured loan and miss your repayments, the risks include:

• Having to pay extra charges
• Harming your credit score 
• The lender taking steps to recover the asset you’ve used as security if the issue persists
• Losing assets like your home or vehicle (usually a last resort, but still a real risk)

Missing repayment on unsecured loans

If you have an unsecured loan and miss your repayments, the consequences can include:

• Harming your credit score
• Having to pay extra charges 
• Debt collection action 
• Being taken to court by the lender if you don’t repay the debt 

If you’re struggling to make loan repayments, seeking help early can make a real difference. You can get support with what you owe from Post Office or talk to external organisations who can help with other debts. 

Other ways of raising the money you need

A personal loan might not be the right option for you. Depending on your needs and financial circumstances, alternatives might work better including:

• Saving up before making a purchase
• Speaking to an independent financial adviser to explore best options

Depending on how urgently or what you need the money for, it’s important to review all options available to you. For some people, delaying borrowing or choosing a different option might be the better choice overall.