Skip to main content

When you lend someone money, there’s always a risk that the borrower might not repay in full. 

As a result, lenders complete lots of checks to minimise the risk that a borrower won’t repay his or her loan, and in certain cases also take security too.

In this article we’ll look at how secured and unsecured loans work, and provide some guidance on how to choose the best option for you. 

If you’re looking for a flexible personal loan of £1,500-7,500, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%

What is the difference between a secured and unsecured personal loan?

Simply put, an unsecured personal loan is one where the lender allows you to borrow money without offering up an asset as security - usually your home. When a lender takes security, your home is at risk if you fail to make repayments.

To give a fuller explanation: secured loans are all around us, and the most familiar example is probably a mortgage. When taking out a mortgage, you’ll borrow a large amount of money, typically hundreds of thousands of pounds. That represents a serious risk to the lender - what if some of their borrowers don’t repay?

To guard against this risk, they take security over the property that’s being purchased. So if you stop paying the mortgage, the bank can take over the property to recover some or all of its losses.

A mortgage is just one example of a secured loan, and there are also secured personal loans allowing you to borrow much smaller amounts for shorter terms. However, they carry the same risk as a mortgage - your home is at risk if you fail to make payments.

A visual representation of how secured loans work

Advantages of unsecured personal loans

A Koyo loan is an example of an unsecured loan. Unsecured personal loans are among the most common forms of credit available, and you can easily find the best personal loans suitable for you, by searching online and using a personal loan calculator

The main advantage of an unsecured personal loan is its relative safety for the borrower. A secured loan carries the risk that you could lose your home if you fail to make repayments, which is an extremely serious outcome. For unsecured personal loans, this risk is “much, much less likely”, according to Money Saving Expert. (1)

Because unsecured loans are so much safer for the borrower, if you’re considering debt consolidation, independent debt charities tend to advise you not to replace unsecured loans or credit card debts with secured loans.

To be clear though, there are still significant consequences for making late payments or defaulting on an unsecured loan, including the potential for a bad credit rating and County Court Judgements (CCJ’s), which makes it very difficult to borrow in the future.

Unsecured personal loans are more flexible (you can borrow smaller amounts) and they don’t require the administration and extra charges you’re likely to incur for a secured loan, regardless of your creditworthiness.

And to state the obvious: in order to qualify for an unsecured loan, you do not need an asset to put up as security, which means you don’t need to be a homeowner.

Advantages of secured personal loans

Secured loans - also known as home equity loans or homeowner loans - are loans where the lender takes an asset (such as your home) as security, meaning that it is at risk if you do not make repayments. 

However, they do have some advantages:

  1. They can be used to borrow larger amounts

  2. You might be able to borrow at a lower interest rate with a secured loan

  3. A secured loan might be your only option if you have a poor credit history 

In practice, people tend to use secured personal loans to borrow loan amounts in the tens or even hundreds of thousands of pounds. Lenders are more comfortable with this since they have an asset as security, and might be able to offer a lower rate for the same reason.

This type of loan is  often used for home improvements, for example, where the total amount required can be high.

It’s worth noting that car loans with security are uncommon, but what you might find in the market is a logbook loan which is a personal loan secured against your car, with similar pricing to payday loans. These tend to be seen as risky and expensive (2), and the Financial Conduct Authority found that annual percentage rates for these loans were typically above 400% APR. (3) 

Which kind of personal loan is right for you?

In order to decide which is the best option for you, you’ll need to weigh up the pros and cons of each.

If you’re considering a loan of any kind, it’s important to be certain that you can afford the monthly repayments, over the duration of the loan period. This is true for both unsecured and secured loans, and you should consider things like changes to your outgoings and use a loan calculator to get a true sense of how the repayments stack up.

A few other things you should consider are:

  • How much do you want to borrow? Could you reduce the loan amount in order to qualify for an unsecured loan

  • Are you comfortable putting your home at risk in exchange for a lower representative APR?

  • Could another form of lending such as a guarantor loan be suitable?


Best for

Typical loan size

Home at risk?

Secured loan

Relatively large loans, possibly at a lower interest rate

Typically tens or hundreds of thousands of pounds

Yes, if you fail to make loan repayments

Unsecured loan

Smaller amounts, typically with more flexibility 

Typically £1,000-£25,000

Much stronger borrower protections

The big question you need to ask yourself is whether you are comfortable putting your house at risk in order to avoid higher interest rates and borrow a larger amount of money.

If you want to know whether a personal loan could affect your credit score, or what credit score you need for a personal loan, we’ve got you covered, as well as a separate guide to personal loans vs credit cards.

How can I make sure I stay protected?

There are no magic tricks here - taking out a secured personal loan necessarily involves putting your home at risk.

There are other options to consider when borrowing money - for example, you could increase your mortgage borrowing if you have sufficient equity, which can be an efficient way to borrow against the value of your house without having to take out a separate loan application. The additional lending is added to your monthly payment and paid off over the loan term - but you’ll need a good credit score, and if you don’t have a fixed rate mortgage, your repayments may vary over time.

We’ve also put together a guide to other options that might be available for borrowers with a fair credit score.

Hopefully you’ve found the above guide useful - but if there are any questions we haven’t answered, let us know in the comments below. And if you want an overview of personal loans in general, take a look at our guide to how a personal loan works.

Now that you’ve read our article on personal loans, you might want to take a look at some of the options available to you. Our loan calculator is a great place to start.


Footnotes:

(1)  https://www.moneysavingexpert.com/loans/cheap-personal-loans/

(2)  https://www.moneyadviceservice.org.uk/en/articles/logbook-loans

(3)  https://www.fca.org.uk/firms/consumer-credit-research-logbook-loans

Leave a Reply