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Most borrowing falls into one of two categories: secured and unsecured loans. Secured loans are backed by an asset, like your home or car, while unsecured loans don’t require collateral.
In this guide, we break down the key differences between secured vs unsecured loans, explain the benefits and risks of each, and explore which loan option might suit your financial goals.
What is a secured loan?
A secured loan is a type of borrowing that’s tied to an asset you own. It’s sometimes referred to as a loan against property, or a loan using collateral, because the lender takes a legal interest in the asset until the loan is repaid.
Because the lender has security in place, they assume less risk, which often means you could access higher loan amounts and enjoy lower interest rates compared to unsecured loans.
For example, a loan against property allows you to borrow money using your home as collateral. If you keep up with repayments, the loan could help finance major expenses, such as home improvements. However, if repayments are missed, the lender may claim the asset.
Types of secured loans
Secured loans use an asset as security for borrowing. Here are the most common types:
1. Mortgage loans
A mortgage helps you buy a property, using the property itself as collateral. Repayments are typically long-term, so it’s important to borrow an amount you can manage comfortably.
2. Home equity loans
Also known as a loan against property, this option allows you to borrow money using the equity in your home. The loan could fund major expenses, but the property remains security for the lender.
3. Car finance
Car finance options, such as hire purchase (HP) or personal contract purchase (PCP), are typically secured against the car, meaning the lender can repossess it if payments are missed.
What is an unsecured loan?
An unsecured loan is a type of borrowing that doesn’t require collateral. Instead, the lender assesses your application based on your credit history and your ability to repay. Because there’s no asset securing the loan, interest rates can be higher than secured loans, and the amount you can borrow is often smaller.
Unsecured loans are usually quicker and easier to apply for, with simpler approval processes and faster access to funds. This makes them a flexible option for covering smaller or short-term expenses, such as home improvements and debt consolidation.
Types of unsecured loans
These loans don’t require any collateral, making them a flexible option for many borrowers. The main types include:
1. Personal loans
These provide a fixed lump sum that you repay in regular monthly instalments. They’re often used for home improvements, debt consolidation, or other planned expenses. Approval is based on your credit history and affordability, rather than on the value of your assets.
2. Car loans
Some personal loans can be used to finance a vehicle without using the car as security. These are unsecured car loans, so approval depends on your credit history and affordability rather than the vehicle itself. Interest rates may be higher than secured car finance, and while the lender has no direct claim on the vehicle, missing repayments could still lead to debt recovery action against your assets.
3. Student loans
Designed to cover tuition fees and living costs, student loans are generally repaid after you finish your studies and reach a minimum income threshold. They are usually unsecured, meaning there’s no collateral involved.
4. Overdrafts
An overdraft lets you temporarily spend more than what’s in your current account. It’s a flexible short-term borrowing option, but many lenders typically charge daily interest on arranged overdrafts unless the amount you have borrowed is within an interest-free limit. Extra costs may also apply if you exceed your agreed limit.
Secured and unsecured loans compared
When deciding which type of loan suits you, think about what you’re borrowing for, how much you need, and your comfort level with risk. Secured loans commonly offer larger sums and lower interest rates, but require collateral. Unsecured loans can be simpler to access and often carry less risk to your property or belongings, although they may come with higher rates. Take a closer look at the key differences below.
Secured vs unsecured loans
| Feature | Secured loans | Unsecured loans |
|---|---|---|
| Collateral | Required (such as your home or car) | Not required |
| Loan amount | Typically sums upwards of £35,000 | Often between £1,000 and £35,000 |
| Loan amount limits | Typically higher | Usually lower, with fixed and variable options |
| Interest rates | Often lower | Typically higher, based on credit history |
| Repayment period | Often longer | Often shorter |
| Risks | Missing repayments could put your asset at risk, lead to additional fees and negatively impact your credit score | No collateral, but missed payments can incur additional fees and negatively impact your credit score |
Pros and cons of secured loans
Like any borrowing option, secured loans come with advantages and drawbacks. It’s essential to consider both before deciding if this is right for you.
Advantages:
- Lower interest rates: Collateral reduces the lender's risk, which often results in lower interest rates.
- Larger borrowing amounts: You can typically access higher sums than with unsecured loans.
- Longer repayment terms: Spreading repayments over a longer period can make monthly amounts more manageable.
- Easier approval with lower credit scores: Having an asset as security can make lenders more willing to approve applications.
Disadvantages:
- Risk of losing collateral: If repayments are missed, the lender could repossess the asset securing the loans.
- Longer-term financial commitment: Monthly repayments may stretch over several years.
- Slower approval process: Secured loans often require property valuations or additional checks.
Pros and cons of unsecured loans
Unsecured loans could be a convenient option, and understanding the pros and cons can help you decide if they’re the right fit.
Advantages
- No collateral required: You don't need to put your home, car, or other assets at risk.
- Faster application process: Less paperwork and fewer checks mean quicker access to funds.
- Ideal for smaller, short-term needs: Suits borrowers looking for a manageable sum for a specific purpose.
Disadvantages
- Higher interest rates: Lenders take on more risk, which could make borrowing more expensive.
- Smaller loan amounts: Without collateral, the amount you can borrow is usually lower than for secured loans.
- Approval depends heavily on credit score: Your credit history often plays a role in whether you're accepted and the interest rate you're offered.
Which type of loan is right for you?
Secured loans, such as mortgages, are used for significant, long-term borrowing where an asset (like your home or car) is required as security. These loans often come with lower interest rates, but your asset is at risk if you can’t keep up with repayments.
Unsecured loans, including personal loans, are ideal for smaller or medium-sized borrowing where you want flexibility and don’t want to use collateral. They’re generally quicker to apply for, though interest rates may be higher, and your credit score affects your eligibility.
Whichever option you’re considering, it's essential to compare the monthly repayments with your budget and ensure you understand any fees, early repayment charges, and how missed payments may impact your credit record.
How to improve your chances of approval
No matter which type of loan you choose, a few steps could help strengthen your application:
- Check your credit score and correct any errors before applying for a loan.
- Reduce existing borrowing where possible to improve affordability.
- Provide accurate, up-to-date information about your income and expenses.
- Only borrow what you genuinely need.
How could The AA help?
We offer loans that could support you for personal finance and car finance. You can apply for personal finance and car finance with The AA and NatWest Boxed if you:
- Are aged 18 or over
- Are a UK resident with a UK address
- Haven't been declared bankrupt in the last 6 years
- Haven't applied for a loan with The AA or NatWest in the last 28 days
Interested in learning about what The AA could offer? Find our more about our personal loans and car finance, and explore our finance guides.
FAQs
What’s the main difference between secured and unsecured loans?
One of the key differences between secured and unsecured loans is the requirement for collateral. A secured loan is tied to an asset, such as property, which the lender can claim if repayments are missed. An unsecured loan doesn’t require collateral, and approval is based on your financial circumstances, like your credit history.
Are secured loans easier to get than unsecured loans?
Secured loans could be easier to qualify for if you have an asset (like property or a car) to use as collateral. Because the lender has financial security, they may be more willing to approve applications, even for borrowers with lower credit scores.
Unsecured loans, on the other hand, rely on your financial circumstances (like your income and credit score) and aren’t tied to your assets.
What happens if I’m unable to repay a secured loan?
If you fall behind on a secured loan, your lender may charge you additional fees and report the missed payments to credit agencies. If the arrears continue, the asset used as security, usually your home or car, could be at risk of repossession. If you’re struggling, it’s always best to contact your lender early so they can help you explore your options.
Do unsecured loans affect your credit score?
Yes. An unsecured loan could help your credit score if you make your repayments on time. Missed or late payments, however, can negatively impact your score and may make future borrowing more expensive or harder to obtain.
Is an unsecured loan safe?
Unsecured loans are generally safe when taken from a regulated, reputable lender. You’re not risking an asset, but you should still make sure the repayments fit comfortably within your budget. As with any borrowing, read the terms carefully so you know exactly what to expect.
What details do I need to take out an unsecured loan?
Requirements vary by lender, but you’ll typically need:
- Personal details and contact information
- Three years of address history
- Employment and income information
- Your bank details
- A credit check, which helps the lender assess affordability
Some lenders may request additional documents, but you can complete most applications quickly online.