There are so many financial options available, that the market can be a minefield if you're looking to take out new credit. While credit cards are the most common, if you’re looking for longer-term borrowing, many opt for a loan. This type of credit falls into two categories, either secured loans or unsecured loans. Knowing which one is best for you is a challenge in itself as it depends on your own circumstances and credit score. Below we highlight the main differences between the two to help understand your options:
There are so many financial options available, that the market can be a minefield if you're looking to take out new credit. While credit cards are the most common, if you’re looking for longer-term borrowing, many opt for a loan. This type of credit falls into two categories, either secured loans or unsecured loans. Knowing which one is best for you is a challenge in itself as it depends on your own circumstances and credit score. Below we highlight the main differences between the two to help understand your options:
What is an unsecured loan?
An unsecured loan, also known as a personal loan, is a type of loan that doesn't require the borrower to provide any property or asset as security for the loan. In other words, you don’t have to pledge anything like a home or car to back the loan. Instead, the lender looks at factors like your credit history, income, and overall financial situation to determine whether to approve the loan. In the event of non-payment, an unsecured loan will usually incur extra interest, fees and possible legal action in order to recover the money lent.
How do unsecured loans work?
Loan repayments are usually made each month on a date chosen by the borrower. These payments are made up of the loan amount, plus interest and any fees divided by the loan term chosen.
Pros and Cons of Unsecured Loans
| Pros | Cons |
| No Asset Required: Since unsecured loans don’t require you to pledge any property, there’s no risk of losing things like your home or car if you miss a payment | Higher Interest Rates: Because there’s no property backing the loan, lenders charge higher interest rates to offset the risk of lending to you. |
| Quicker Approval Process: Without the need to evaluate a property, unsecured loans can often be approved faster, making them a good option for urgent financial needs. | Lower Loan Amounts: Since the lender has no property to claim if you default, they may only lend you a smaller amount compared to a secured loan. |
| Less Risk to Your Property: If you fail to repay an unsecured loan, the lender can’t take your personal property. However, they can still take legal action or impact your credit file. | Impact on Credit Score: Missing payments or defaulting on an unsecured loan can seriously damage your credit score and make it harder to get future loans. |
What is a secured loan?
A secured loan is a type of loan where the borrower pledges an asset, like a home, car, or other valuable property, as collateral. This gives the lender added security, because if the borrower is unable to repay the loan, the lender can take possession of the asset to recover the owed amount. Because secured loans are less risky for lenders, they typically offer lower interest rates than unsecured loans. Common examples of a secured loan include mortgages (secured by a property) and car loans (secured by the vehicle).
How do secured loans work?
Secured loans work in the same way as unsecured loans with repayments and interest charges based on the amount borrowed and the repayment term.
Pros and Cons of Secured loans
| Pros: | Cons: |
| Lower Interest Rates: Because the loan is backed by an asset, lenders often offer lower interest rates compared to unsecured loans, making them more affordable in the long run. | Risk of Losing the Asset: If you fail to repay the loan, the lender can seize the property you used to back the loan, such as your home or car. |
| Larger Loan Amounts: Secured loans typically allow you to borrow more money since the lender has an asset to fall back on. | Takes Time to Set Up: Since the loan is backed by an asset, there may be additional paperwork and a more complex approval process |
| Longer Repayment Terms: Secured loans may come with longer repayment terms, making the monthly payments more manageable. | Asset Depreciation: If the value of your asset decreases (e.g., a car loses value over time), it might not be enough to cover the loan if you default. |
Secured vs unsecured loans
Both secured and unsecured loans have their advantages and disadvantages and the right choice depends on your financial situation and needs.
Secured loans often come with lower interest rates and larger loan amounts, but they carry the risk of losing your property if you fail to repay. On the other hand, unsecured loans don’t require any property to back the loan, so you won’t risk losing assets. However, they typically have higher interest rates and stricter approval criteria vs a loan secured against an asset.
It is important to carefully assess your financial goals, creditworthiness, and ability to repay before making a decision.
Which one is right for you?
Each type of loan has its positives and negatives, and with everyone's circumstances being different, what is right for one person, won’t be the best option for someone else. Secured loans are a good option if you need a larger amount of money and have an asset to back it up, while unsecured loans might be a better fit if you don’t want to risk losing property and are okay with higher interest rates or smaller loan amounts.
What do Norwich Trust offer?
Norwich Trust loans give homeowners access to the funds they need without using your home as security. Our unsecured loans are an alternative for those who are not eligible for a secured loan. They are also suitable for those who don’t wish to use their property as security and don’t want to pay any fees, as well as those who don’t want to wait several weeks for funds.
While some lenders specialise in unsecured loans for bad credit, you will usually need a fair to good credit score to be eligible for an unsecured loan from a high street lender. However, Norwich Trust will not assess your application purely on credit score. We take a manual approach to our underwriting so even if you’ve had a few financial hiccups in the past we may still be able to help you, and your home or vehicle won’t be at risk.
We hope you found this article informative and that it helped you understand your options.
Category: unsecured loans
None of the articles published on this website are intended to constitute financial advice and should be used for informational purposes only. If you require financial advice, please contact your local Citizen’s Advice Bureau, Stepchange or other independent advisors.