Here, we explain what secured and unsecured lending means, and which type of loan may be right for you.
A secured loan is money borrowed, or ‘secured’, against an asset you own, usually your home. For example, a mortgage to buy your property is a type of secured loan.
Your home acts as a form of security for the lender, as they could repossess and sell the property if you were unable to meet the loan repayments. For this reason, secured loans typically have lower interest rates than unsecured loans, and you may be able to borrow a larger amount.
The amount you can borrow for a mortgage is based on a number of factors. These may include:
The maximum amount you can borrow may also be dependent on your loan-to-value (LTV) ratio – the size of the loan as a proportion of the value of your home.
An unsecured loan isn’t tied to an asset. This means the lender can’t take away any of your assets, such as your home, if you fail to repay what you owe. However, any late or missed repayments can negatively impact your credit score and your ability to borrow money in the future.
A personal loan is a type of unsecured loan. They can be helpful if you need to borrow money to renovate your home, buy a car or consolidate debts, for example. Other forms of unsecured borrowing include credit cards and overdrafts.
Interest rates vary between lenders and loan types. A lender will decide if they’re willing to lend to you, how much and at what interest rate, based on things like your income, credit score and what you need the loan for.
Whether your loan is secured or unsecured will sometimes depend on what you’re hoping to borrow the money for. For example, a mortgage is always a secured loan.
On the other hand, if you wanted to pay for a renovation, for example, you may have the choice between a secured loan, such as a home equity loan, or an unsecured loan, such as a home improvement loan.
Unsecured loans can be useful when you want to borrow a relatively large amount, without the risk of losing your home. However, missed payments can still impact your credit score.
No matter what type of loan you apply for, you need to be able to meet the repayments and factor these into your budget. It’s also important to consider the terms, fees and charges associated with the loan you want to take out.