Secured and unsecured borrowing explained

The term ‘secured’ refers to the fact a lender will need something as security in case you can’t repay the loan. This will usually be your home, but it could also be your car, jewellery or other assets.

Secured loans are less risky for lenders because they can take your asset if you can’t make the repayments. Lenders will often lend more and over a longer term than unsecured loans, typically at a lower interest rate.

Some secured loans have expensive arrangement fees and other charges. Make sure you factor this in when you work out how much the loan is going to cost you. Arrangement fees and other set-up costs should be included in the annual percentage rate of chargeOpens in a new window

There are several types of secured loans you might see advertised.

You might be able to borrow more money against your home from your current mortgage lender. This might be useful if you’re looking to pay for some home improvements or to raise a deposit to buy a second home.

Find out in our guide Increasing your mortgage – getting a further advance.

A first mortgage loan is usually used to buy a home. A second mortgage is similar to a home equity loan, as it involves borrowing more against the portion you own, but the agreement is with a different lender.  

See second mortgages explained for full information.

If you owe money on a number of different credit products, such as loans and credit cards, you could choose to pay them all off with a new loan so you have one payment to worry about. This is known as debt consolidation.

See What are debt consolidation loans? for full help.

Loans secured against your car are known as logbook loans. Generally, they’re expensive, risky and best avoided.

Pawnbrokers offer loans secured against jewellery, antiques, or other assets. They can lend money quickly, but their interest rates are usually higher than high-street banks (but lower than payday loans).

If you’ve decided a secured loan is the best choice for you, your first step might be to see what your mortgage lender will offer. 

Next, use comparison websites to see if other lenders would offer a better deal. Just make sure the quote is using a soft credit check as these don’t harm your credit score and remember they rarely compare every deal on the market.

As well as researching the cost of borrowing, compare the terms and conditions of each loan and always make sure you understand what would happen if you can’t repay. 

Find out more in our guide Understanding mortgages and interest rates.

Unsecured loans are also known as personal loans. This involves borrowing money from a bank or other lender. You agree to make regular payments until the loan is repaid in full, together with any interest owed. 

If you’re late with a payment or miss one altogether, you might be charged a penalty fee and a negative mark recorded on your credit file. 

If you can’t afford to repay, always ask your lender for an alternative repayment plan. If you don’t, as a last resort, the lender can take you to civil court to try and get their money back.

See how to find the best personal loan deal.

A loan is just one way to borrow money.

If you’re unhappy with how a lender has treated you, your first step should be to complain to them. 

If you don’t get a satisfactory response within eight weeks, you can complain to the Financial Ombudsman ServiceOpens in a new window