Secured loan or personal loan: what’s the difference?

Secured loan or personal loan: what’s the difference?

author: Bryony Pearce

By Bryony Pearce

Taking out a loan is a big decision and we want to help you make the right one.


Whatever reason it’s for, if you’re considering taking out a loan, you’ve probably seen the terms ‘secured loan’ and ‘personal loan’ a lot. But if you’re confused by what they mean, don’t worry – we’re here to help you understand these two different types of loans and which might be more suitable for you.

There are some fairly substantial differences between secured and personal loans, which we’ll cover in this article, along with the advantages and disadvantages of each. So if you’re thinking you’ve scuppered your chances of being accepted for a loan because of a bad credit history, we’ll tell you that’s not necessarily the case.

Secured loan

A secured loan is often referred to as a homeowner loan, as the money is nearly always secured against a property. Therefore, only people who own their own home can apply for this type of loan. In a similar way to a mortgage, failing to keep up with secured loan repayments can put your home at risk, so keeping a close eye on what you can afford each month is key.

Secured loan advantages

The risk associated with repossession may seem daunting, but there are several advantages of secured loans over personal loans. Firstly, having a bad credit score doesn’t always get in the way of you accessing a secured loan. This is because the loan is secured against your property, and the lender knows they have this to fall back on should you struggle with repayments. Better yet, if you’ve got a less than perfect credit score and decide to take out a secured loan, keeping up with the monthly repayments could improve your credit record over time.

The second benefit is that you’re likely to be able to borrow more money with a secured loan, and you can pay it back over a longer period of time. By spreading the repayments over a longer term, you could find that you’re paying back less each month than with a personal loan, which may help with budgeting. On a similar note, another advantage of a secured loan is that you might find lower APR rates are offered compared to a personal loan but this will depend on your credit profile and individual circumstances.

In the event that you’re still paying off your existing mortgage, this doesn’t affect your ability to apply for a secured loan, which are sometimes referred to as second charge loans.

Personal loan

A personal loan – sometimes called an unsecured loan – isn’t secured against an asset. For this reason, your credit history will play a bigger role in a lender’s decision, and you might be less likely to be offered a personal loan with bad credit. But don’t lose hope, there are lenders, like Ocean, who specialise in finding loans for people with a less-than-perfect credit history, and have years of experience in doing so.

Personal loans are typically used for borrowing smaller sums of money than secured loans and the loan term tends to be shorter. So, if you’re looking to borrow between £100 and £25,000 and you want to pay it back within a few years (usually between 2 and 5), then a personal loan might be suited to you.

Personal loan advantages

The key advantage of a personal loan over a secured loan is that you don’t stand to lose your home if for some reason you struggle to make the repayments. The only potential problem with this is that, instead of your property, lenders will look at your credit record as well as your income in order to judge affordability and the likelihood you’ll keep up with the repayments. Like we mentioned previously, a bad credit score isn’t the be all and end all in accessing a personal loan – you might just find you’re offered a smaller personal loan with higher interest rates.

Another benefit of a personal loan is that the monthly repayment amount is fixed and agreed on between you and the lender, based on what you can afford.

Like secured loans, this should allow for straightforward budgeting for the duration of your loan. Also, as with secured loans, keeping up to date with monthly repayments in full and on time could improve your credit score over time.

Secured vs personal loans: which one should you choose?

As you can see from all the information above, there’s not one type of loan that’s better than the other. Instead, it comes down to suitability and what it is that you‘re looking for from a loan.

If you’re looking to borrow a larger amount of money and pay it back over a longer period of time –and you own your own home – then a secured loan may be the best option for you.

On the other hand, if you’re looking for a smaller sum and would rather pay it back over a shorter timeframe with fixed repayments, then a personal loan might be better suited to you.

Will bad credit affect my choice?

If your less-than-perfect credit score is what’s concerning you when it comes to applying for credit, don’t automatically rule out either type of loan. If you’d rather take out a personal loan so you have a fixed monthly repayment, then there may well be options for you, however, you might face higher interest charges as a consequence. With a secured loan, your poor credit is less likely to hold you back, but just remember that you’re putting your home at risk if you don’t keep up the repayments.

With either type of loan, you can begin improving a bad credit score by making your loan repayments on time and in full each month.

As with any type of loan, it’s always important to carefully consider how much you need to borrow and how much you can afford to pay back each month before committing.

Hopefully, now you’ll feel more informed about the differences between secured and personal loans! For more information on lending with poor credit, read our article ‘Can I get a loan with bad credit?

Disclaimer: All information and links are correct at the time of publishing.

author: Bryony Pearce

By Bryony Pearce

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Secured loan or personal loan: what’s the difference? Secured loan or personal loan: what’s the difference?