Secured vs unsecured loan: What's the difference?

The loans for your lifestyle

A loan can make life's big events happen. Buying your first house or a dream car, planning that special wedding day, or even just building up your credit rating.

Discover which personal loan can help you plan for the future, or manage those unexpected costs.

The two types of personal loans

The type of loan you apply for depends on what you want to use it for.

  • Unsecured – normally for amounts between £5,000 and £25,000, and not tied to any asset.
  • Secured – loans which are tied to an asset as collateral or security, often over £25,000.

Loans for credit-building, studying, holidays or special occasions are typical unsecured loans, which don't require collateral.

Unsecured personal loans

Building a credit history
Taking out a loan, often in the form of a credit card, can help build up your credit history – and improve your credit rating.

Paying back credit on time shows lenders that you can borrow money responsibly. This can improve your chances of a successful application in future, especially for a larger loan like a mortgage.

Further education
University tuition fees in the UK cost up to £9,250 per year. After three years, an undergraduate degree course adds up to almost £28,000, not including your daily living bills.

Many students can't cover such high costs alone, and their families may not be able to help with the fees.

To help you, the UK government provides student loans for the fees, and will only take repayments after you graduate and begin to earn above a certain threshold.

That once in a lifetime holiday
We all tend to save for a holiday each year. However, that once in a lifetime trip often has large upfront fees, and would-be explorers might need a personal loan to cover the costs.

Consolidate your debts
One of the most common reasons for taking out a loan is to consolidate debts. For instance, a loan can consolidate your credit cards debts into one monthly payment, which can be much cheaper and easier to manage.

Gifts and special occasions
Many of us mark memorable moments in our lives by splashing out on a special occasion or gifts.

Depending on the size, a wedding, landmark anniversary, birthday celebration, or a graduation gift or party, can cost anywhere between £2,000 to £15,000. This could be hard to pay in a lump sum.

But a loan allows you to pay the amount back in affordable instalments, though the repayments usually include an interest charge.

Secured personal loans

A mortgage for a new property
A mortgage helps you get on the property ladder and set up home. Buyers put down a deposit, usually more than 5% of the property price, and the bank or lender loans the rest of the money.

You then pay back the lender in monthly instalments – including interest – as agreed in the contract. The mortgage interest is usually lower than unsecured loans.

The property you're buying is normally put up as collateral or security – if payments are missed, the lender can reclaim the asset.

A mortgage loan is a major step in your life, but it may also have serious consequences if the monthly payments are not met.

Car and motorcycle loans
A car or a motorcycle is often an essential part of daily life, but the cost can be an obstacle to owning one.

Car finance can help you with the purchase and spread the cost of the vehicle over several years. There are various options to finance your next car, including PCP (Personal Car Purchase) and PCH (Personal Contract Hire).

Personal loans help you cover a range of large one-off costs, from new home to home improvements.

But it's important to keep in mind that whether it's unsecured or secured, a loan is a debt that must be repaid – usually with added interest. Knowing all the details of a loan before applying is essential.

AA Financial Services has previously offered personal loans and savings accounts. AA Financial Services Limited is a credit broker and not a lender

Author: The AA. Published 14 July 2021. Updated 9 November 2023.