Is a personal loan secured or unsecured?

Personal loans are unsecured, which means you don’t need any collateral to take one out. A secured loan, on the other hand, must be tied to an asset you own, such as your house. This acts as a safety net for the lender and enables them to lend larger sums compared to unsecured loans.

5 min read
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What is a personal loan?  

A personal loan is a lump sum of money that you borrow. The amount can range from £1,000 up to around £25,000, depending on the lender and your individual circumstances. Personal loans are repaid in regular instalments over a fixed amount of time, usually between one to five years.

At the beginning of your personal loan agreement, an interest rate will be set and included in your monthly repayments. Interest is essentially the cost applied by the lender, for the privilege of borrowing money.

Personal loans can be used for anything from small home improvements to large purchases. Except for illegal activity, there are no restrictions on what a personal loan can be used for. Having said that, you will be asked the reason for taking out a loan on your application.

What is the difference between secured and unsecured loans? 

The main difference between secured and unsecured loans is in the title: secured loans must be secured to an asset that you own, such as your home - whereas unsecured loans don’t. This fundamental difference is the root of the other differences between secured and unsecured loans.

Unsecured loans

Unsecured loans tend to be most suitable for those with good credit scores. This is because, in the absence of collateral, lenders try to minimise their risk by lending only to those that they feel confident can make their repayments in full and on time, every time.

If you have a good credit score, it’s a good indication that you can manage money well. The higher your score, the lower risk you’ll appear. This not only increases the likelihood of being accepted for an unsecured personal loan but also improves your chances of being offered competitive interest rates.

Secured loans

Secured loans (also known as ‘homeowner loans’ or second charge mortgages) allow you to borrow large sums – usually up to around £100,000 (though exactly how much will depend on your individual circumstances).  Lenders tend to feel more confident in lending higher amounts with lower interest rates if you are using your home as collateral – even if you have less-than-perfect credit.

Remember, you may be forced to sell your home to cover the cost of your secured loan if you fall behind with payments, though this is usually only a last resort.

What happens if you default on an unsecured personal loan? 

While your home won’t be at risk if you fail to repay an unsecured personal loan, your credit score and ability to get credit in the future will be. If you don’t make your repayments, this will show on your credit report for lenders to see.

Defaulting on a personal loan can also result in legal action from lenders; they can file a County Court Judgement (CCJ) against you, which will be shown on your credit report for six years. If you still fail to pay after receiving the CCJ, further legal action could be taken, such as creditors instructing bailiffs to take your goods (up to the value of your debt).

So, while unsecured loans may feel less risky than secured loans, they should not be undertaken lightly, as failing to make your repayments can have serious repercussions for your financial life.

How much can I borrow on an unsecured personal loan? 

Unsecured personal loans tend to start at around £1,000 and can go up to £25,000. In rare cases, they may lend more, such as if you’re taking the loan out from a lender with whom you already have an account. But for most lenders, personal loans generally tend to peak at £25,000.

How long can I borrow money for? 

With both unsecured and secured loans, you borrow a set amount of money over a fixed period, so you know from the very beginning how long you’re borrowing the money for. How long the loan term is, depends on the type of loan you get, and how much you’re able to repay each month.

With unsecured personal loans, most lenders tend to offer one to five years. Secured loans, on the other hand, tend to have longer loan terms, particularly as the amounts are normally larger. As such, the repayment period can be up to as much as 40 years, but they are generally between three and 25 years.

In both cases, it’s up to you how long you want to borrow the money for within these timeframes. If you want lower monthly repayments, you’ll need to choose a longer period, but it’s important to remember that the longer you borrow for, the more interest you’ll pay overall.

It’s also important to keep in mind that you can’t change your terms once you’ve signed your agreement (unless there are exceptional circumstances), so make sure you can commit to the agreed repayments for the full length of the loan. Failing to make these can impact your credit score and your ability to get credit in the future.

Where can I get an unsecured personal loan?  

You can get an unsecured personal loan directly from a lender, a comparison website, or through a broker like us here at Ocean. 

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Intelligent Lending Ltd is a credit broker working with a panel of lenders.